Research Discussion Paper – RDP 8812 International Interest Rate Linkages and Monetary Policy: The Case of Australia


This paper attempts to answer a number of questions about the relationship between movements in Australian long-term interest rates and movements in long-term interest rates abroad. In particular, it looks at the question of whether the relationship between interest rates in Australia and abroad has altered since the floating of the Australian dollar.

It concludes that the volatility of the long-term interest rates in Australia has decreased and that they are now less closely synchronised with international rates than formerly. There is no evidence that the influence of short-term interest rates on long-term interest rates has become less pronounced; if anything, it is now stronger.

These are the standard sorts of results one would expect for a country that has moved from a quasi fixed exchange rate to a floating exchange rate regime.

The final section examines the transmission process of monetary policy from short-term interest rates to long-term interest rates. It also looks at the influence of the growth of the Euro-Australian dollar market. Two appendices give more details on the analytical techniques that have been used to answer the main questions set out above. The first appendix is based on the interest parity condition, and the second is based on the term structure of interest rates in Australia.

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