The yield spread and real economic activity : the impact of globalisation

One of the enduring linkages between financial markets and the real economy is that the shape of the interest rate curve is seen as a good predictor of future output growth. However, little is known about the effect of globalisation on this relationship. This paper examines whether, in the wake of the internationalisation of the Australian economy in the past decade and a half, there is today an identifiable relationship between the foreign yield spread and Australian GDP growth. Using the US interest rate spread as a proxy for the world yield curve, a link is found to exist with Australian GDP growth. There is evidence the link has strengthened as the economy has seen greater exposure to globalisation.17 page(s

The Yield Spread and Real Economic Activity: The Impact of Globalisation

One of the enduring linkages between financial markets and the real economy is that the shape of the interest rate curve is seen as a good predictor of future output growth. However, little is known about the effect of globalisation on this relationship. This paper examines whether, in the wake of the internationalisation of the Australian economy during the past decade and a half, there is today an identifiable relationship between the foreign yield spread and Australian GDP growth. Using the US interest rate spread as a proxy for the world yield curve, a link is found to exist with Australian GDP growth. There is evidence the link has strengthened as the economy has seen greater exposure to globalisation.

The Market for Negotiable Certificates of Deposit in Australia: 1973–1980

Liability management by the Australian trading banks is a relatively recent development, largely made possible by the inroduction of negotiable certificates of deposit (NCD’s). The market for NCD’s also acts as an important link in transmitting credit market disturbances to non-bank financial intermediaries. Relatively little attention has been paid to analysing the working of this market in Australia. This paper presents and estimates two models of the NCD market. In the first case the hypothesis of short term rationing, that arises from various restrictions on the operation of the market, is tested. The second model assumes that the market clears in the short run but adjusts with a lag to the desired long run position. Our results favour the second model. In addition, the demand for NCDs by the non-bank public depends on wealth and interest rates. The supply of NCD’s by the banks depends on the banks liquidity position and on interest rates. The results suggest that banks may use asset management instead of liability management when rates rise on liquid assets of the banks. Adjustment by the non-bank public to the long run demand is instantaneous, while the banks adjust with a lag. Our results suggest that approximately 84 per cent of the adjustment in the banks’ supply occurs within one year.

An Econometric Model of the Australian Trading Banks: 1974–1980

This paper reports on an econometric model of the aggregate behaviour of the Australian trading banks, using monthly data from January 1974 to June 1980. There are two reasons for this study. First, there have been several changes in the institutional environment in which banks operate as a consequence of some deregulation and attempts by the financial sector to circumvent some regulation. Hence, there is a need to focus attention on a period in which government regulation is relatively homogeneous. Second, by using monthly data of reatively recent vintage some better idea of the dynamics of portfolio adjustment by the banks will be obtained. Previous studies have frequently made use of relatively long runs of quarterly data and, for the most part, have found lengthy adjustment lags. The estimated model comprises ten behavioural equations and one identity. There are equations for demand deposits, fixed deposits, negotiable certificates of deposit, overdraft advances and commercial bill acceptances, all of which have been modelled as being determined by the non-bank public. In turn, the banks are assumed to determine the supply of negotiable certificates of deposit, fully drawn loans, overdraft limits, bill acceptance limits and the stock of excess liquid assets (determined residually). There is also an equation for the interest rate on commercial bills. The dynamic simulation properties of the model are also reported, as are the results of three counterfactual experiments. Broadly speaking, the results support the theoretical model that is presented in an appendix. Adjustment by both the banks and the non-bank public is rapid, with most average lages being less than four months.