After the Financial Crisis, the Influence of US Monetary Policy on Korea Increased

[Asia Economy Reporter Kim Eun-byeol] Since the global financial crisis, the influence of U.S. monetary policy on domestic short- and long-term bond yields has expanded.

According to the Bank of Korea on the 30th, shocks from U.S. monetary policy have a significant positive (+) effect on domestic government bond yields, particularly impacting long-term bonds with a large portion of term premiums. The Bank of Korea defined "monetary policy shocks" as unexpected elements in U.S. interest rate decisions, statements, and press conferences, and analyzed their effects from January 2001 to March 2019 using an event study approach.

Notably, before the financial crisis, the correlation between U.S. monetary policy shocks and domestic interest rates was insignificant, but a clear relationship has emerged since the crisis.

When examining the correlation between 5-year government bond yields and U.S. monetary policy shocks, the correlation was negligible at -0.004 before the financial crisis but turned positive to 0.242 afterward. Similarly, the 1-year government bond showed a correlation of -0.035 before the crisis and 0.179 after.

A Bank of Korea official explained, "As policy coordination tendencies among countries have strengthened, market expectations that other central banks will follow major countries' monetary policy changes have increased, leading to this phenomenon."

U.S. monetary policy significantly affected short- and medium-term government bond yields, while unconventional monetary policy had a greater impact on long-term government bond yields. The sensitivity of long-term government bond yields to U.S. monetary policy shocks after the financial crisis appears to be due to unconventional monetary policy shocks primarily influencing the term premium of government bonds.

The Bank of Korea official added, "Given the increased influence of global factors on the domestic financial market since the financial crisis, it is necessary to be more flexible in monetary policy operations in response to major countries' economic and monetary policy changes." They also noted, "Although sensitivity to U.S. monetary policy in the foreign exchange swap market price variables has recently weakened, this may be due to the current account surplus trend. It is important to strive to maintain an appropriate level of current account surplus to ensure stability in foreign exchange supply and demand."

This content was produced with the assistance of AI translation services.