Term Structure, Inflation, and Economic Growth in Selected East Asian Countries
The issue of term structure of interest rates has been a much-researched area in economics and finance in several developed economies for over a century. It is argued that the term spread between long and short rates contain useful information about future interest rates, inflation, and real econ...
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| Main Author: | |
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| Format: | Thesis |
| Language: | English |
| Published: |
2007
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/5581/1/FEP_2007_17%20IR.pdf |
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| Summary: | The issue of term structure of interest rates has been a much-researched area in
economics and finance in several developed economies for over a century. It is
argued that the term spread between long and short rates contain useful
information about future interest rates, inflation, and real economic activity
which is of great importance to policy makers.
This study attempts, first, to determine whether there is a time-varying risk
premium in the short-term interest rate, and secondly, to provide an in-depth
study on the term structure of interest rates and its impacts on the movements
of short-term interest rates, inflation rates and real output in the five selected
East Asian countries via an extended model of Expectation Hypothesis Theory
of Term Structure. The five selected Asian countries are Japan, South Korea,
Malaysia, Thailand and the Philippines. These objectives are achieved through
the employment of the Generalized Method of Moment and Ordinary Least Square with Newey-West standard errors and Heteroskedasticity and
autocorrelation consistent covariance correction.
One interesting finding of this analysis is that there is a small risk premium in
the short-term interest rates of Japan and Thailand, whereas there is none in
those of Korea, Malaysia and the Philippines. This implies the stability of the
short-term interest rates in the latter. In all the five cases, regardless of a timevarying
risk premium in the interest rate, the term spreads of all these countries
seem to contain useful information for predicting movements in the short-term
interest rates. On the other hand, for the case of predicting the path of inflation
rate, only three countries, namely, Japan, Korea and Malaysia, indicate a
possible increase in future inflationary pressure. The two other countries, the
Philippines and Thailand, did not benefit any useful information regarding the
future inflation rates from term spreads, Similarly, the term spread also does not
provide any relevant information on the real output of Malaysia, the Philippines
and Thailand. However, it does provide relevant information for the case of
Japan and Korea.
The estimated results and findings of this study provide some very useful
insight on the information contained in interest rate term spreads of the five
countries. This useful information on interest rate, inflation and economic
activity can benefit both the government and private sectors of the five countries in developing macroeconomic policies and gaining competitiveness in the
global market. |
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