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Causality Links Between Asset Prices And Cash Rate In Australia

Author

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  • West, L.k.
  • Agbola, W.F.

Abstract

This paper seeks to empirically investigate the causal linkages between asset prices and Australia’s cash rate. Quarterly data spanning the period 1980:1 and 2002:4 were employed in the analysis. The Johansen MLE multivariate co-integration procedure reveals that Australia’s cash rate and key determinants are co-integrated, and thus share a long-run equilibrium relationship. The Stock-Watson dynamic OLS model (DOLS), which is superior to a number of alternative estimators, finds empirical evidence of significant long run relationship between Australia’s cash rate and house prices, stock market prices, inflation rate and Australia’s real gross domestic product, and United States cash rate and real gross domestic product. The US cash rate Granger causes Australia’s cash rate. Australia’s stock market price Granger causes Australia’s house prices. The Granger causality test reveals a unidirectional causality from house prices to Australia’s cash rate, which is contrary to the conventional wisdom of a bi-directional causality running from the cash rate to house prices.

Suggested Citation

  • West, L.k. & Agbola, W.F., 2005. "Causality Links Between Asset Prices And Cash Rate In Australia," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(3), pages 69-86.
  • Handle: RePEc:eaa:ijaeqs:v:2:y2005:i:3_5
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    File URL: http://www.usc.es/economet/reviews/ijaeqs235.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Australia; cash rate; house prices; cointegration; Stock-Watson DOLS;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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