Research Discussion Paper – RDP 9008 Financial Deregulation and the Monetary Transmission Mechanism


Major changes to the Australian financial system occurred in the 1980s that were potentially important for the effects of monetary policy on economic activity. Using vector autoregressive econometric techniques we find that, in fact, the deregulation of the financial system has made very little difference to the reduced form relationships between interest rates, employment growth, inflation and the growth rate of real credit. We find that interest rates are an important determinant of both the business cycle and inflation, with credit being much less influential. We also find that monetary policy reacts to unexpected movements in real variables but does not react to unexpected changes in the rate of inflation.

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