Advanced Search
MyIDEAS: Login to save this article or follow this journal

Causality Links Between Asset Prices And Cash Rate In Australia

Contents:

Author Info

  • West, L.k.
  • Agbola, W.F.
Registered author(s):

    Abstract

    This paper seeks to empirically investigate the causal linkages between asset prices and Australia’s cash rate. Quarterly data spanning the period 1980:1 and 2002:4 were employed in the analysis. The Johansen MLE multivariate co-integration procedure reveals that Australia’s cash rate and key determinants are co-integrated, and thus share a long-run equilibrium relationship. The Stock-Watson dynamic OLS model (DOLS), which is superior to a number of alternative estimators, finds empirical evidence of significant long run relationship between Australia’s cash rate and house prices, stock market prices, inflation rate and Australia’s real gross domestic product, and United States cash rate and real gross domestic product. The US cash rate Granger causes Australia’s cash rate. Australia’s stock market price Granger causes Australia’s house prices. The Granger causality test reveals a unidirectional causality from house prices to Australia’s cash rate, which is contrary to the conventional wisdom of a bi-directional causality running from the cash rate to house prices.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.usc.es/economet/reviews/ijaeqs235.pdf
    Download Restriction: No

    Bibliographic Info

    Article provided by Euro-American Association of Economic Development in its journal International Journal of Applied Econometrics and Quantitative Studies .

    Volume (Year): 2 (2005)
    Issue (Month): 3 ()
    Pages: 69-86

    as in new window
    Handle: RePEc:eaa:ijaeqs:v:2:y2005:i:3_5

    Contact details of provider:
    Web page: http://www.usc.es/economet/eaa.htm

    Order Information:
    Email:
    Web: http://www.usc.es/economet/info.htm

    Related research

    Keywords: Australia; cash rate; house prices; cointegration; Stock-Watson DOLS;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. repec:att:wimass:9220 is not listed on IDEAS
    2. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    3. Gordon de Brouwer & Luci Ellis, 1998. "Forward-looking Behaviour and Credibility: Some Evidence and Implications for Policy," RBA Research Discussion Papers rdp9803, Reserve Bank of Australia.
    4. Frank Smets, 1997. "Financial-asset Prices and Monetary Policy: Theory and Evidence," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
    5. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 631-53, October.
    6. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.
    7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    8. David Gruen & John Romalis & Naveen Chandra, 1997. "The Lags of Monetary Policy," RBA Research Discussion Papers rdp9702, Reserve Bank of Australia.
    9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    10. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
    11. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
    12. Muscatelli, Vito Antonio & Hurn, A Stan, 1992. " Cointegration and Dynamic Time Series Models," Journal of Economic Surveys, Wiley Blackwell, vol. 6(1), pages 1-43.
    13. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    14. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
    15. Christopher Kent & Philip Lowe, 1997. "Asset-price Bubbles and Monetary Policy," RBA Research Discussion Papers rdp9709, Reserve Bank of Australia.
    16. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
    17. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
    18. Vickers, John, 2000. "Monetary Policy and Asset Prices," Manchester School, University of Manchester, vol. 68(0), pages 1-22, Supplemen.
    19. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    20. Masih, Rumi & Masih, Abul M. M., 2000. "A Reassessment of Long-Run Elasticities of Japanese Import Demand," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 625-639, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eaa:ijaeqs:v:2:y2005:i:3_5. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (M. Carmen Guisan).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.