Monetary Policy Surprises and the Bank Bill Term Premium

43 Pages Posted: 27 Aug 2007 Last revised: 18 Jul 2011

See all articles by Kathleen D. Walsh

Kathleen D. Walsh

University of Technology Sydney (UTS)

David Tan

School of Finance, Actuarial Studies, and Applied Statistics, Australian National University

Date Written: November 2007

Abstract

Has Australia's shift to an inflation-targeting monetary policy regime had a significant impact on investors' perception of the interest rate risks in the market' Using a GMM estimation approach, we analyse the impact of Australian monetary policy adjustments on the 180-day and 30-day bank bill term premium throughout the period of 1985 to 2005, and find that since 1990, unanticipated adjustments to monetary policy have had a significantly larger impact on the term premium. This coincides with Australia's adoption of an inflation-targeting monetary policy framework. Since its implementation, unanticipated adjustments to monetary policy have conveyed more information to financial markets regarding the interest rate risks in the economy. This new information is immediately assessed and accounted for in the term structure, consequently influencing the term premium in the direction of the unanticipated cash rate adjustment.

Keywords: unanticipated monetary policy, bank bill term premium

JEL Classification: E52

Suggested Citation

Walsh, Kathleen D. and Tan, David, Monetary Policy Surprises and the Bank Bill Term Premium (November 2007). Available at SSRN: https://ssrn.com/abstract=1009447 or http://dx.doi.org/10.2139/ssrn.1009447

Kathleen D. Walsh

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

David Tan (Contact Author)

School of Finance, Actuarial Studies, and Applied Statistics, Australian National University ( email )

Canberra, Australian Capital Territory 0200
Australia

HOME PAGE: http://cbe.anu.edu.au/staff/info.asp?Surname=Tan&Firstname=David

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