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The term structure of interest rates in Australia: an application of long run structural modelling

  • A. Mansur
  • M. Masih
  • Vicky Ryan

The term structure of interest rates in Australia, using data of different types as well as frequencies covering the period 1991(11) to 2000(9) is investigated using a relatively new modelling strategy previously untested on Australian interest rate data. Developed by Pesaran and Shin (2002), this strategy incorporates long-run structural relationships in an otherwise unrestricted vector autoregression model (VAR). The econometric tests indicate that in Australia, contrary to popular belief, long-term interest rates more often than not lead shorter-term interest rates, at least for the interest rates and time period under investigation. While these findings are not conclusive, if they are an accurate representation of interest rate behaviour, this does pose a major challenge for the monetary policy in Australia. The findings are consistent with the recent experience of the USA as well (Sarno and Thornton, 2003). The findings of the study based on recent rigorous time-series techniques tend to cast doubts on the efficiency and effectiveness of current monetary policy in Australia.

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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 15 (2005)
Issue (Month): 8 ()
Pages: 557-573

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Handle: RePEc:taf:apfiec:v:15:y:2005:i:8:p:557-573
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  1. Masih, Rumi & Masih, Abul M. M., 2001. "Long and short term dynamic causal transmission amongst international stock markets," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 563-587, August.
  2. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
  3. A Garratt & K Lee & M Pesaran & Yongcheol Shin, 2004. "A long run structural macroeconometric model of the UK," ESE Discussion Papers 35, Edinburgh School of Economics, University of Edinburgh.
  4. Pesaran, M.H. & Shin, Y., 1993. "Cointegration and Speed of Convergence to Equilibrium," Cambridge Working Papers in Economics 9311, Faculty of Economics, University of Cambridge.
  5. Pesaran,H.M. & Shin,Y., 1995. "Long-Run Structural Modelling," Cambridge Working Papers in Economics 9419, Faculty of Economics, University of Cambridge.
  6. Bloch, F A, 1974. "The Term Structure of Interest Rates in Australia: A Test Using the Error-learning Model," The Economic Record, The Economic Society of Australia, vol. 50(129), pages 77-93, March.
  7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  8. Campbell, John, 1986. "A Defense of Traditional Hypotheses about the Term Structure of Interest Rates," Scholarly Articles 3207698, Harvard University Department of Economics.
  9. Sarno, Lucio & Thornton, Daniel L, 2002. "The Dynamic Relationship Between the Federal Funds rate and the Treasury Bill Rate: An Empirical Investigation," CEPR Discussion Papers 3225, C.E.P.R. Discussion Papers.
  10. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  11. 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.
  12. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  13. Ross Guest & Alan McLean, 1998. "New evidence on the expectations theory of the term structure of Australian Commonwealth Government Treasury yields," Applied Financial Economics, Taylor & Francis Journals, vol. 8(1), pages 81-87.
  14. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
  15. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  16. Mellander, Erik & Vredin, A & Warne, A, 1992. "Stochastic Trends and Economic Fluctuations in a Small Open Economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 369-94, Oct.-Dec..
  17. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  18. Dominguez, Emilio & Novales, Alfonso, 2000. "Testing the expectations hypothesis in Eurodeposits," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 713-736, October.
  19. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
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  22. Karfakis, C.I. & Moschos, D.M., 1993. "The Information Content of the Yield Curve in Australia," Working Papers 185, University of Sydney, School of Economics.
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  24. Longstaff, Francis A, 1990. " Time Varying Term Premia and Traditional Hypotheses about the Term Structure," Journal of Finance, American Finance Association, vol. 45(4), pages 1307-14, September.
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