A new test for nonlinear causality and also nonparametric procedures suggest significant nonlinearity in the implementation of the Taylor rule by the Bank of Korea (BOK). In particular, the response to the output gap appears nonlinear.

This paper has three objectives. First, it examines the link between the term spread (difference between long-term and short-term rate of interest) and GDP growth in the Korean economy for the period 1980-1999. Second, it tests for the independent information content of the term spread by...