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Causality Links Between Asset Prices And Cash Rate In Australia

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  • West, L.k.
  • Agbola, W.F.
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    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.

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    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

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    Handle: RePEc:eaa:ijaeqs:v:2:y2005:i:3_5

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    Web page: http://www.usc.es/economet/eaa.htm

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    Related research

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

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    References

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    1. 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.
    2. 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.
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