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Operating procedures and the expectations theory of the term structure of interest rates: the New Zealand experience from 1989 to 2008

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  • Alfred V. Guender
  • Allan G. J. Wu

Abstract

The operating procedure of a central bank influences in no small measure whether the behaviour of interest rates is consistent with the Expectations Hypothesis (EH). In New Zealand, the predictive content of the term spread improves markedly in the wake of the switch from a quantity-based to a price-based operating procedure in March 1999. The Official Cash Rate (OCR) system has made it easier for market participants to understand the day-to-day conduct of monetary policy. As a result, market interest rates have become more predictable, thereby contributing to the success of the EH in explaining the behaviour of yields on short-dated financial instruments.

Suggested Citation

  • Alfred V. Guender & Allan G. J. Wu, 2012. "Operating procedures and the expectations theory of the term structure of interest rates: the New Zealand experience from 1989 to 2008," Applied Financial Economics, Taylor & Francis Journals, vol. 22(14), pages 1181-1192, July.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:14:p:1181-1192
    DOI: 10.1080/09603107.2011.641925
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    References listed on IDEAS

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    1. Mankiw, N. Gregory & Miron, Jeffrey A. & Weil, David N., 1994. "The founding of the Fed and the behavior of interest rates : What can be learned from small samples?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 555-559, December.
    2. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
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    Cited by:

    1. Buckle, Robert A., 2018. "Thirty years of inflation targeting in New Zealand: The origins, evolution and influence of a monetary policy innovation," Working Paper Series 20927, Victoria University of Wellington, Chair in Public Finance.

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