RDP 8607: The Expectations Theory of the Term Structure and Short-Term Interest Rates in Australia 4. Conclusion

The aim of this paper has been to ascertain the relationship between short-term interest rates for the period after the introduction of the Treasury note tender system in 1979. In general, it has been found that the expectations hypothesis could not be rejected. Furthermore, the hypothesis could not be rejected in the period before or the period after the float.

These results are in marked contrast to the numerous rejections of the expectations hypothesis in the U.S. Possible reasons for this difference are the different policy regimes in place when the studies were conducted and different risk factors in the U.S. and Australian markets. At this stage, these must remain tentative explanations.

If the difference between the results reported here and those in the U.S. can be attributed to risk factors specific to the U.S. market then empirical research, in the U.S., should attempt to incorporate these specific risks rather than attempting to develop models of general intertemporal risk aversion.

The results reported in this paper have focussed on the yields on short-term financial assets. Future research in this area should extend this and consider the relationship between short-term yields and yields on much longer dated securities. To the extent that investment decisions are related to longer term yields, knowledge of the relationship between short and much longer term yields is important for policy purposes.