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Identifying Interest Rates Transmission Mechanism under a Bayesian Network
Version 1
: Received: 30 May 2024 / Approved: 30 May 2024 / Online: 30 May 2024 (13:44:48 CEST)
A peer-reviewed article of this Preprint also exists.
Chun, B.J. Identifying Interest Rate Transmission Mechanism under a Bayesian Network. Sustainability 2024, 16, 5840. Chun, B.J. Identifying Interest Rate Transmission Mechanism under a Bayesian Network. Sustainability 2024, 16, 5840.
Abstract
This study examines the causal relationships between interest rates in the Korean financial market using a vector error correction model (VECM) and a Bayesian network. The Bayesian network, a novel approach in this context, identifies two distinct transmission channels: one led by call rates (reflecting monetary policy) and another by 10-year Treasury bond yields (reflecting fiscal policy). While the call rate channel aligns with traditional views, affecting bank lending rates, corporate bond spreads, and commercial paper rates, the 10-year Treasury yield channel highlights a separate fiscal policy transmission mechanism, influencing commercial paper rates indirectly through 30-year Treasury yields and directly impacting merchant bank lending rates. This finding suggests that fiscal intervention could potentially interfere with monetary policy, emphasizing the need for coordinated macroeconomic policy measures. The study also emphasizes the role of 10-year Treasury bonds as a benchmark in the Korean bond market, reflecting medium- to long-term economic outlooks and serving as the underlying asset for various derivatives.
Keywords
interest rate transmission path; Bayesian network; Korean financial markets; directed acyclic graph; monetary policy; fiscal policy
Subject
Business, Economics and Management, Business and Management
Copyright: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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