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

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Author Info
Alison Tarditi (Reserve Bank of Australia)
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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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!] (restricted)
  2. Jeremy Smith & David Gruen, . "A Random Walk around the $A: Expectations, Risk, Interest Rates and Consequences for External Imbalance," RBA Research Discussion Papers rdp8906, Reserve Bank of Australia.
  3. Malcolm Edey, . "Operating Objectives for Monetary Policy," RBA Research Discussion Papers rdp9007, Reserve Bank of Australia.
  4. Gabriel de Kock & Thomas DeLeire, 1994. "The role of the exchange rate in the monetary transmission mechanism: a time-series analysis," Research Paper 9412, Federal Reserve Bank of New York.
  5. Tamim Bayoumi & Peter B. Clark & Steven A. Symansky & Leonardo Bartolini, 1994. "Exchange Rates and Economic Fundamentals: A Framework for Analysis," IMF Occasional Papers 115, International Monetary Fund.
  6. 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. [Downloadable!] (restricted)
  7. In't Veld, Jan Willem, 1991. "Fundamental balance and equilibrium exchange rates," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 279-291, June. [Downloadable!] (restricted)
  8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  9. Murphy, C W, 1988. "Rational Expectations in Financial Markets and the Murphy Model," Australian Economic Papers, Blackwell Publishing, vol. 27(0), pages 61-88, Supplemen.
  10. Tamim Bayoumi & Peter B. Clark & Steven A. Symansky & Mark P. Taylor, 1994. "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," IMF Working Papers 94/17, International Monetary Fund.
  11. repec:fip:fedreq:y:1990:i:sep:p:3-26:n:v.76no.5 is not listed on IDEAS
  12. Adrian Blundell-Wignall & Jerome Fahrer & Alexandra Heath, 1993. "Major Influences on the Australian Dollar Exchange Rate," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia. [Downloadable!]
  13. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia. [Downloadable!]
  14. John Simon, 1996. "A Markov-Switching Model of Inflation in Australia," RBA Research Discussion Papers rdp9611, Reserve Bank of Australia. [Downloadable!]
  15. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
  16. 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. [Downloadable!] (restricted)
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  17. 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, Economics Department. [Downloadable!]
  18. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70. [Downloadable!] (restricted)
  19. 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.
  20. David WR Gruen & Jenny Wilkinson, 1991. "Australia's Real Exchange Rate - Is it Explained by the Terms of Trade or by Real Interest Differentials?," RBA Research Discussion Papers rdp9108, Reserve Bank of Australia. [Downloadable!]
  21. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York. [Downloadable!]
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  22. 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. [Downloadable!] (restricted)
  23. 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.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia. [Downloadable!]
  2. Christopher Kent & Philip Lowe, 1997. "Asset-price Bubbles and Monetary Policy," RBA Research Discussion Papers rdp9709, Reserve Bank of Australia. [Downloadable!]
  3. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia. [Downloadable!]
  4. Kelly R Eckhold, 1998. "Determinants of New Zealand bond yields," Reserve Bank of New Zealand Discussion Paper Series G98/1, Reserve Bank of New Zealand. [Downloadable!]
  5. Nikola Dvornak & Marion Kohler & Gordon Menzies, 2003. "Australia’s Medium-run Exchange Rate: A Macroeconomic Balance Approach," RBA Research Discussion Papers rdp2003-03, Reserve Bank of Australia. [Downloadable!]
    Other versions:
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