Research Discussion Paper – RDP 9009 An Empirical Model of Australian Interest Rates, Exchange Rates and Monetary Policy


In this paper we use daily data to examine the relationships between the unofficial cash rate, the $A/$US exchange rate and other interest rates. In particular, we investigate whether any change in these relationships occurred after October 1987. Amongst other results, we find that in the period January 1985 to October 1987, shocks to the exchange rate and expected inflation led to a significant monetary policy reaction, but that in the period October 1987 to January 1990 this reaction was much less prominent. The response of the exchange rate to shocks in expected inflation also appears to have significantly changed in the later period, being far more responsive than was earlier the case.

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