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

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

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  1. 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.
  2. 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.
  3. Frank Campbell & Eleanor Lewis, 1998. "What Moves Yields in Australia?," RBA Research Discussion Papers rdp9808, Reserve Bank of Australia.
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