Interactions of monetary and macroprudential policies in a model of the Korean economy

노트 : Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung - Session: Financial Stability, No. G02-V

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Testing Target Zone Credibility with a Limited Dependent Variable Rational Expectations Model

This essay applies a limited dependent variable rational expectations model to estimate the French Franc/Deutsche Mark (FF/DM) exchange rate in order to test the credibility of the European Exchange Rate Mechanism (ERM) for these currencies. The existing literature treats the exchange rate within the band as an unbounded con-tinuous variable. The exchange rate within a target zone is a bounded variable censored beyond the upper and lower band margins. If the censored nature of the exchange rate is ignored the parameter estimates will be biased. The confidence intervals for expected realignment will reflect this bias and distort the result of credibility tests. The limited dependent variable rational expectations model integrates this feature of the exchange rate mechanism into the estimation process. Moreover, it explicitly models expectations of economic agents who will incorporate the bounded nature of the data into their information sets when forming expectations about exchange rate movements. I find considerable support for modeling the exchange rate using a limited dependent variable framework. My results indicate that accounting for the band in the drift adjustmen

Stresstesting Household Debt in Korea

Korean household debt has reached 148 percent of disposable income, high by emerging market standards. Most of this debt remains at variable rates, shifting the interest rate risk from better diversified financial institutions to households and increasing their sensitivity to macroeconomic shocks. This paper examines the sources of, and risks from, household debt by employing stress tests on household level panel data. Results suggest that a 100-300 bps increase in interest rates could increase distressed household debt household debt by 8½?17 percentage points (ppt). A drop in real estate prices by 10?30 percent could add another 4 ppt to distressed debt. Ongoing transition to amortizing mortgages in 2008?09 presents additional challenges as interest payments on debt are likely to increase further.Public debt;Interest rates;Income distribution;Real estate prices;Economic models;real estate, real estate owners, mortgages, mortgage, homeownership, real estate price, housing finance, mortgage loans, home ownership, housing loans, real estate assets, mortgage market, housing prices, nontraditional mortgages, variable rate mortgages, real estate values, mortgage loan, home mortgages