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An Analysis of the Dynamic Linkages between the Cash Rate and the Government Yield Curve: A Case Study - Un’analisi della relazione dinamica tra cash rate e curva dei rendimenti dei titoli pubblici: studio di un caso

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Abstract

This paper aims to examine the relationship between the rate of interest on the key instrument of monetary policy in Australia, the overnight cash rate and the debt instruments comprising the Australian Government Yield curve, during the climate of low inflation and transparent monetary policy in Australia since the early 1990s. This relationship is fitted to an Expectations Theory based function. The methods applied are the error-correction and variance decompositions techniques including the most recently developed ‘long run structural modelling’ (Pesaran and Shin, 2002). The findings indicate that, contrary to common belief, longer-term interest rates more often than not tend to lead the cash rate and other shorterterm rates. Australian monetary policy relies on the assertion that the shorter term rate leads the longer term rates, and that changes in the cash rate will reverberate through the yield curve to the longer term rates, which in turn affect aggregate demand and other economic indicators. The findings of our study based on the recent rigorous time-series techniques tend to cast doubts on the efficiency and effectiveness of current monetary policy in Australia. - Scopo del presente studio è esaminare la relazione tra il tasso d’interesse e gli strumenti chiave della politica monetaria australiana, l’overnight cash rate e la curva dei rendimenti dei titoli pubblici australiani, nel periodo di bassa inflazione e politica monetaria “trasparente” che si è verificato in Australia sin dai primi anni 90. Tale relazione viene studiata con una funzione basata sulla teoria delle aspettative. I metodi applicati sono le tecniche error-correction e di scomposizione della varianza, compreso il long run structural modelling, proposti da Pesaran e Shin (2002). I risultati indicano che, contrariamente all’opinione comune, sono i tassi di interesse a più lungo a guidare il cash rate e gli altri tassi a breve. La politica monetaria australiana si fonda sull’ipotesi che i tassi a breve guidano i tassi a lungo e che le modifiche al cash rate si estendono, attraverso la curva dei rendimenti, ai tassi a più lungo termine i quali, a loro volta, influenzano la domanda aggregata e le altre variabili economiche. I risultati del nostro studio sollevano dubbi sull’efficacia della politica monetaria attualmente adottata in Australia.

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  • Masih, A. Mansur M. & Ryan, Vicky, 2010. "An Analysis of the Dynamic Linkages between the Cash Rate and the Government Yield Curve: A Case Study - Un’analisi della relazione dinamica tra cash rate e curva dei rendimenti dei titoli pubblici: s," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 63(3), pages 329-359.
    • Handle: RePEc:ris:ecoint:0601
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    References listed on IDEAS

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    1. Anthony Garratt & Kevin Lee & M. Hashem Pesaran & Yongcheol Shin, 2003. "A Long run structural macroeconometric model of the UK," Economic Journal, Royal Economic Society, vol. 113(487), pages 412-455, April.
    2. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
    3. repec:syd:wpaper:185 is not listed on IDEAS
    4. I.J. Macfarlane, 1988. "International Interest Rate Linkages and Monetary Policy: The Case of Australia," RBA Research Discussion Papers rdp8812, Reserve Bank of Australia.
    5. Karfakis, C.I. & Moschos, D.M., 1993. "The Information Content of the Yield Curve in Australia," Working Papers 185, University of Sydney, School of Economics.
    6. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-126, February.
    7. Ross Guest & Alan McLean, 1998. "New evidence on the expectations theory of the term structure of Australian Commonwealth Government Treasury yields," Applied Financial Economics, Taylor & Francis Journals, vol. 8(1), pages 81-87.
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    More about this item

    Keywords

    Cash Rate and the Government Yield Curve; Long Run Structural Modelling;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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