KDI Journal of Economic Policy

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P-ISSN 1738-656X

Vol.29, No.2

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한국개발연구. Vol. 29, No. 2, December 2007, pp. 135-157

https://doi.org/10.23895/kdijep.2005.29.2.135

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IV ECM Threshold Cointegration Tests and Nonlinear Monetary Policy in Korea

Walter Enders; Jun soo Lee; Marck C. Strazicich

Author & Article History

Manuscript .

Abstract

The goal of this paper is to examine the validity of nonlinear Taylor rules in Korea. To perform our tests, we utilize new IV ECM threshold cointegration tests that are invariant to nuisance parameters. The new tests have a standard chi-square distribution and the same critical values can be used throughout. This is in contrast to OLS ECM threshold cointegration tests, which depend on nuisance parameters and have nonstandard distributions. After finding significant support for nonlinear cointegration, we find that the Bank of Korea raises the call rate of interest only when inflation is above a threshold rate. We additionally find that the Bank of Korea increases the call rate of interest to possibly counter domestic currency deprecation only when the rate of currency deprecation exceeds a threshold.

Keywords

Monetary Policy(통화정책), Korea(한국), Taylor Rule(테일러 룰), Threshold Cointegration(분계점 공적분)

JEL Code

C220, E4

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