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Extracting expectations of New Zealand's Official Cash Rate from the bank-risk yield curve

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Abstract

The hypothesis that a forward term-premium (FTP) exists between forward 1- day rates calculated from the New Zealand bank-risk yield curve and the corresponding ex-post Official Cash Rate (OCR) is tested by applying a single equation method for a cointegrated system to daily data from March 1999 to December 2001. The results indicate that the FTP is statistically significant for all forward horizons tested. The results also indicate that the estimates of the FTP appear to be an increasing function of the forward horizon, and the FTP may be tentatively represented as a simple monotonically-increasing analytical function. The model may be used in reverse to imply current ex-ante expectations of the OCR.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2002/01.

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Length: 35p
Date of creation: Mar 2002
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Handle: RePEc:nzb:nzbdps:2002/01

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  1. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Harvard Institute of Economic Research Working Papers 1713, Harvard - Institute of Economic Research.
  2. Leo Krippner, 1998. "Testing the predictive power of New Zealand bank bill futures rates," Reserve Bank of New Zealand Discussion Paper Series G98/8, Reserve Bank of New Zealand.
  3. 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.
  4. Graeme Guthrie & Julian Wright & Jun Yu, 1999. "Testing the expectations theory of the term structure for New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 33(1), pages 93-114.
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Cited by:
  1. Michael Gordon, 2003. "Estimates of time-varying term premia for New Zealand and Australia," Reserve Bank of New Zealand Discussion Paper Series DP2003/06, Reserve Bank of New Zealand.

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