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What Do Financial Market Data Tell Us about Monetary Policy Transparency?

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Author Info

  • Jonathan Coppel

    (Reserve Bank of Australia)

  • Ellis Connolly

    (Reserve Bank of Australia)

Abstract

This paper attempts to discern from financial market data the impact of greater monetary policy transparency over the period since the late 1980s. We examine whether interest rate variability has changed, the degree to which financial markets anticipate policy moves and movements in the yield curve at the time of changes in monetary policy. Where possible, we compare the results for Australia with other countries. We find that interest rate volatility at the short end has fallen dramatically since the late 1980s. The extent to which market participants anticipate changes in the policy rate has gradually risen, as has the speed of reaction to interest rate announcements. Since the late 1990s, bill futures contract prices have responded to the Reserve Bank of Australia’s (RBA) commentaries on the economy. These results are consistent with an increase in the efficiency with which the market digests economic news. The results are quite similar across countries, and it is difficult to isolate from cross-country data any specific preferred model of monetary policy transparency.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2003-05.

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Date of creation: May 2003
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Handle: RePEc:rba:rbardp:rdp2003-05

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Related research

Keywords: transparency; monetary policy; accountability; central banking;

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References

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  1. Daniel C. Hardy, 1998. "Anticipation and Surprises in Central Bank Interest Rate Policy: The Case of the Bundesbank," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 647-671, December.
  2. Frank Campbell & Eleanor Lewis, 1998. "What Moves Yields in Australia?," RBA Research Discussion Papers rdp9808, Reserve Bank of Australia.
  3. Mardi Dungey & Ben Hayward, 2000. "Dating Changes in Monetary Policy in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(3), pages 281-285.
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Citations

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Cited by:
  1. Wilhelmsen, Bjørn-Roger & Zaghini, Andrea, 2005. "Monetary policy predictability in the euro area: an international comparison," Working Paper Series 0504, European Central Bank.
  2. Eijffinger, Sylvester C W & Geraats, Petra M & van der Cruijsen, Carin A B, 2006. "Does Central Bank Transparency Reduce Interest Rates?," CEPR Discussion Papers 5526, C.E.P.R. Discussion Papers.
  3. Ellis Connolly & Marion Kohler, 2004. "News and Interest Rate Expectations: A Study of Six Central Banks," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  4. TUYSUZ, Sukriye, 2007. "Central Bank transparency and the U.S. interest rates level and volatility response to U.S. news," MPRA Paper 5217, University Library of Munich, Germany.
  5. Matthias Neuenkirch, 2011. "Central Bank Transparency and Financial Market Expectations: The Case of Emerging Markets," MAGKS Papers on Economics 201136, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  6. Eijffinger, Sylvester C W & van der Cruijsen, Carin A B, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers 6070, C.E.P.R. Discussion Papers.
  7. M.H. Middeldorp, 2011. "FOMC Communication Policy and the Accuracy of Fed Funds Futures," Working Papers 11-13, Utrecht School of Economics.
  8. Menno Middeldorp, 2011. "Central bank transparency, the accuracy of professional forecasts, and interest rate volatility," Staff Reports 496, Federal Reserve Bank of New York.
  9. Tuysuz, Sukriye, 2007. "The asymmetric impact of macroeconomic announcements on U.S. Government bond rate level and volatility," MPRA Paper 5381, University Library of Munich, Germany.
  10. Lavan Mahadeva, 2007. "A model of market surprises," Bank of England working papers 327, Bank of England.
  11. Bryan Chapple, 2006. "Monetary policy strategies and credibility - theory and practice," DNB Occasional Studies 404, Netherlands Central Bank, Research Department.

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