Three essays on the term structure of interest rates

Three chapters focus on the term structure of interest rates. Most Central Banks have recently employed the short term interest rate as a monetary policy instrument in the form of either a Taylor rule or Inflation Targeting. Under this framework, the term structure of interest rates play an important role in determining the effectiveness of monetary policy because economic decisions are based on long-term interest rates. The first two chapters discuss the role of the term structure of interest rates in explaining the behavior of exchange rates. Chapter 1 constructs a theoretical model and Chapter 2 provides an empirical result to support this theoretical prediction. Chapter 3 directly estimates the term structure of interest rates from Korean data. The estimated yield curves are used to extract market expectations about the future interest rates path which is essential for forward-looking monetary policy.