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Monetary policy implementation and uncovered interest parity: empirical evidence from Oceania

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Abstract

The close integration of Australian and New Zealand financial markets and the similarity of the monetary policy regimes provide the perfect backdrop for testing the empirical relevance of uncovered interest rate parity (UIP) in Oceania. We find that changes in the bilateral exchange rate have become more sensitive to the short-term interest differential over time. Most important, after the introduction of the Official Cash Rate regime in New Zealand, the responsiveness of the exchange rate has accelerated to such an extent that it is incompatible with UIP. Evidence on UIP over longer horizons is mixed with a 10-year horizon providing the strongest support for the theory since 1990.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1071.pdf
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Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 10/71.

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Length: 35 pages
Date of creation: 01 Jun 2010
Date of revision:
Handle: RePEc:cbt:econwp:10/71

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  1. David Archer & Andy Brookes & Michael Reddell, 1999. "A cash rate system for implementing monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, March.
  2. Razzak, W A, 2002. "The Forward Rate Unbiasedness Hypothesis Revisited," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(4), pages 293-308, October.
  3. Gabriele Galati & Michael Melvin, 2004. "Why has FX trading surged?," BIS Quarterly Review, Bank for International Settlements, December.
  4. Guender, Alfred V. & Oh, Do Yoon, 2006. "Price stability through price-level targeting or inflation targeting? A tale of two experiments," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 373-391.
  5. James R. Lothian & Liuren Wu, 2003. "Uncovered Interest Rate Parity Over the Past Two Centuries," International Finance 0311009, EconWPA.
  6. Alexius, Annika, 2001. "Uncovered Interest Parity Revisited," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 505-17, August.
  7. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
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