This paper reports on an econometric model of the aggregate behaviour of the Australian trading banks, using monthly data from January 1974 to June 1980. There are two reasons for this study. First, there have been several changes in the institutional environment in which banks operate as a consequence of some deregulation and attempts by the financial sector to circumvent some regulation. Hence there is a need to focus attention on a period in which government regulation is relatively homogeneous. Second, by using monthly data of relatively recent vintage some better idea of the dynamics of portfolio adjustment by the banks will be obtained. Previous studies have frequently made use of relatively long runs of quarterly data and, for the most part, have found lengthy adjustment lags. The estimated model comprises ten behavioural equations and one identity. There are equations for demand deposits, fixed deposits, negotiable certificates of deposit, overdraft advances and commercial bill acceptances, all of which have been modelled as being determined by the non-bank public. In turn, the banks are assumed to determine the supply of negotiable certificates of deposit, fully drawn loans, overdraft limits, bill acceptance limits and the stock of excess liquid assets (determined residually). There is also an equation for the interest rate on commercial bills. The dynamic simulation properties of the model are also reported, as are the results of three counterfactual experiments. Broadly speaking, the results support the theoretical model that is presented in an appendix. Adjustment by both the banks and the non-bank public is rapid, with most average lags being less than four months.
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