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The effects of central banks’ rate change patterns on financial market variables

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Frame of Image  in determining the level of target interest rates. In spite of similarities in economic situations across nations, their central banks act differently from one another when it comes to the frequency and range of interest rate changes. Inspired by such observations, Wook Sohn at the KDI School of Public Policy and Management and Byeongmook Sung at the Bank of Korea examine whether central banks’ patterns of changing interest rates are associated with their contributions to variances in the forecast errors in financial markets variables, but no robust results are found. They also conduct panel analyses to show that the frequency and range of changes in policy rates are significantly related to the volatility of long-term interest rates. A monetary policy is the endogenous response of central banks to developments in the economy and financial markets. I hope this paper can help scholars and policymakers better understand and get involved in researches on the nature of central banks’ monetary policy decisionmaking and financial market responses. The views expressed herein are those of the authors and should not be attributed to the Korea Development Institute or the Bank of Korea.
Joon-Kyung KIM President of KDI
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Contents
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Preface Summary CHAPTER 1 Introduction CHAPTER 2 Pattern of Central Bank Rate Changes CHAPTER 3 Central Banks’ Interest Rates and Financial Market Variables
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CHAPTER 4 Association of the Pattern of a Central Bank’s Rate Changes and Its Contribution t


Full Text
Title The effects of central banks’ rate change patterns on financial market variables
Similar Titles
Material Type Reports
Author(English)

Sohn, Wook; Sung, Byeongmook

Publisher

Seoul:Korea Development Institute

Date 2013-11
Series Title; No Policy Study / 2013-01
ISBN 978-89-8063-789-8
Pages 43
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding KDI; KDI School

Abstract

When a consumer switching cost is not negligible, firms may consider the possibility that consumers could be captured and locked-in later. Then they often want to lure consumers using special marketing strategies such as mileage programs and/or special deals on new arrivals. The rewards program by credit cards can be understood in the same vein, since it sometimes costly for consumers from one credit card to another. This work studies credit card companies’ optimal choice of duration when the reward program is maintained, and shows that the minimum duration regulation by the regulation authorities might be rather harmful for consumers. Due to the regulation, the firms are able to attract more consumers, especially the ones who were not buying since they believed the reward program would be terminated soon enough. Given the newly increased demand, however, firms have more incentives to reduce the length when the reward program is maintained.