University of Waikato

An interest rate transmission mechanism for New Zealand

Email address: loxley@waikato.ac.nz

Abstract:
The passing of the Reserve Bank Act (RBA) in 1989 marked a watershed in role of the Reserve Bank and the operation of monetary policy in New Zealand. Until the introduction of the Official Cash Rate (OCR) in March 1999 the Reserve Bank focused on controlling the price (or quantity) of 'settlement cash' assuming the 'transmission mechanism' would 'do the rest'. The introduction of the OCR represented a need for a more direct and transparent signal to the financial security about interest rates. In this paper we attempt to identify an interest rate transmission mechanism for New Zealand during the RBA-period using cointegration and SVAR methods. The sample period is spilt into pre- and post-OCR regimes in an attempt to identify any changes consequent upon the change in monetary policy regime. To anticipate, pre-OCR 90-day bank bill rate innovations appeared to have a strong and pervasive effect on medium-term rates except the base lending rate whose dynamics seemed to be parsimoniously explained by its own innovations. Post-OCR the 1-year Government stock yield appears to assume the role previously played by the 90-day bank bill rate, where the rate may be proxying the OCR.

PDF file of paper: Not available.

Session: Applied Econometrics I

Time: Sunday, 8 July, 8am - 9:30am

Room: F