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International Interest Rate Linkages and Monetary Policy: The Case of Australia

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  • I.J. Macfarlane

    (Reserve Bank of Australia)

Abstract

This paper attempts to answer a number of questions about the relationship between movements in Australian long-term interest rates and movements in long-term interest rates abroad. In particular, it looks at the question of whether the relationship between interest rates in Australia and abroad has altered since the floating of the Australian dollar. It concludes that the volatility of the long-term interest rates in Australia has decreased and that they are now less closely synchronised with international rates than formerly. There is no evidence that the influence of short-term interest rates on long-term interest rates has become less pronounced; if anything, it is now stronger. These are the standard sorts of results one would expect for a country that has moved from a quasi fixed exchange rate to a floating exchange rate regime. The final section examines the transmission process of monetary policy from short-term interest rates to long-term interest rates. It also looks at the influence of the growth of the Euro-Australian dollar market. Two appendices give more details on the analytical techniques that have been used to answer the main questions set out above. The first appendix is based on the interest parity condition, and the second is based on the term structure of interest rates in Australia.

Suggested Citation

  • I.J. Macfarlane, 1988. "International Interest Rate Linkages and Monetary Policy: The Case of Australia," RBA Research Discussion Papers rdp8812, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp8812
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    File URL: https://www.rba.gov.au/publications/rdp/1988/8812.html
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    Cited by:

    1. Akhtaruzzaman, Md & Shamsuddin, Abul & Easton, Steve, 2014. "Dynamic correlation analysis of spill-over effects of interest rate risk and return on Australian and US financial firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 378-396.
    2. 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.
    3. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.
    4. 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.
    5. A. Mansur & M. Masih & Vicky Ryan, 2005. "The term structure of interest rates in Australia: an application of long run structural modelling," Applied Financial Economics, Taylor & Francis Journals, vol. 15(8), pages 557-573.
    6. Stephen Grenville, 1990. "The Operation of Monetary Policy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 23(2), pages 6-16, June.
    7. Sandy Suardi, 2010. "Nonstationarity, cointegration and structural breaks in the Australian term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 42(22), pages 2865-2879.

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