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Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations

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  • Alison Tarditi

    (Reserve Bank of Australia)

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    Abstract

    More than two decades have passed since the initial relaxation of domestic interest rate controls in Australia and just over one decade since the float of the Australian dollar. Interest rates and exchange rates now constitute two of the most important channels through which macroeconomic policy can affect the broader economy. It is widely recognized that expectations play a critical role in these mechanisms, affecting both the timing and speed with which interest and exchange rates transmit shocks through to real activity and prices. Over the longer run, the influence of these two asset prices extends to the efficient allocation of capital and resources. This paper builds on previous work undertaken at the Reserve Bank and the OECD to develop single-equation, behavioural models of these two variables. Consideration is paid to the role of inflation expectations in affecting their behaviour. In particular, a model of ex ante real bond yields is estimated using a measure of forward-looking inflationary expectations which has been constructed by recourse to a Markov switching technique.

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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9608.

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    Date of creation: Nov 1996
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    Handle: RePEc:rba:rbardp:rdp9608

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    1. Malcolm L. Edey, 1990. "Operating Objectives for Monetary Policy," RBA Research Discussion Papers rdp9007, Reserve Bank of Australia.
    2. Dwyer, Jacqueline & Kent, Christopher & Pease, Andrew, 1994. "Exchange Rate Pass-Through: Testing the Small Country Assumption for Australia," The Economic Record, The Economic Society of Australia, vol. 70(211), pages 408-23, December.
    3. John Simon, 1996. "A Markov-switching Model of Inflation in Australia," RBA Research Discussion Papers rdp9611, Reserve Bank of Australia.
    4. David Gruen & Tro Kortian, 1996. "Why Does the Australian Dollar Move so Closely with the Terms of Trade?," RBA Research Discussion Papers rdp9601, Reserve Bank of Australia.
    5. Phylaktis, Kate & Kassimatis, Yiannis, 1994. "Does the real exchange rate follow a random walk? The Pacific Basin perspective," Journal of International Money and Finance, Elsevier, vol. 13(4), pages 476-495, August.
    6. Goodwin, Thomas H, 1993. "Business-Cycle Analysis with a Markov-Switching Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 331-39, July.
    7. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
    8. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    9. Murphy, C W, 1988. "Rational Expectations in Financial Markets and the Murphy Model," Australian Economic Papers, Wiley Blackwell, vol. 27(0), pages 61-88, Supplemen.
    10. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    11. Adrian Orr & Malcolm Edey & Michael Kennedy, 1995. "The Determinants of Real Long-Term Interest Rates: 17 Country Pooled-Time-Series Evidence," OECD Economics Department Working Papers 155, OECD Publishing.
    12. Steven A. Symansky & Peter B. Clark & Leonardo Bartolini & Tamim Bayoumi, 1994. "Exchange Rates and Economic Fundamentals," IMF Occasional Papers 115, International Monetary Fund.
    13. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
    14. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.
    15. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, vol. 55(220), pages 437-60, November.
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    Cited by:
    1. Chowdhury, Khorshed, 2007. "Are The Real Exchange Rate Indices of Australia Non-Stationary in the Presence of Structural Break?," Economics Working Papers wp07-05, School of Economics, University of Wollongong, NSW, Australia.
    2. Chowdhury, Khorshed, 2012. "Modelling the dynamics, structural breaks and the determinants of the real exchange rate of Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 343-358.
    3. Hogan, Warren P. & Batten, Jonathan A., 2005. "Informed and uninformed trading on the Australian dollar," International Review of Financial Analysis, Elsevier, vol. 14(1), pages 61-75.

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