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Connecting the dots: a yield curve perspective on New Zealand’s interest rates

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Abstract

This article explains the concept of the yield curve, the pattern of interest rates by their time to maturity, and how that concept helps to provide some perspective on the multitude of different interest rates that exist in modern economies. The dominance of macroeconomic influences on the government yield curve are discussed, and then the additional factors of default risk and liquidity risk are introduced in the context of the bank and mortgage yield curves. The article also indicates how careful analysis of the yield curve may be used to back out information of interest to the Reserve Bank, such as the market expectations about the path of the Official Cash Rate (OCR) and future economic growth, and how interest rate influence the exchange rate.

Suggested Citation

  • Leo Krippner, 2010. "Connecting the dots: a yield curve perspective on New Zealand’s interest rates," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, September.
    • Handle: RePEc:nzb:nzbbul:sept2010:1
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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2010/2010sep73-3krippner.pdf
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    References listed on IDEAS

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    1. Leo Krippner, 2008. "A Macroeconomic Foundation for the Nelson and Siegel Class of Yield Curve Models," Research Paper Series 226, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    3. Leo Krippner, 2006. "A Theoretically Consistent Version of the Nelson and Siegel Class of Yield Curve Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 39-59.
    4. Leo Krippner, 2006. "A Yield Curve Perspective on Uncovered Interest Parity," Working Papers in Economics 06/16, University of Waikato.
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    Cited by:

    1. Enzo Cassino, 2012. "Modelling New Zealand mortgage interest rates?," Reserve Bank of New Zealand Analytical Notes series AN2012/10, Reserve Bank of New Zealand.
    2. Adam Richardson & Rebecca Williams, 2015. "Estimating New Zealand’s neutral interest rate," Reserve Bank of New Zealand Analytical Notes series AN2015/05, Reserve Bank of New Zealand.

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