research
Central Bank Transparency and Bank Lending rates: Australian Evidence
- Publication date
- Publisher
Abstract
In the past fifteen years central banks have been taking steps towards greater monetary policy transparency. This paper uses a vector error correction model (VECM) to investigate the role transparency has had on changing the dynamics of the credit channel of the Australian monetary policy transmission mechanism. The Reserve Bank of Australia (RBA) lifted all interest rate restrictions in 1986, and then started to announce changes in the cash rate in January 1990 giving the financial system a clearly defined indication of its monetary policy stance. Furthermore, the RBA formalised its inflation targeting operating objective in 1996. This paper gives a clear indication of how a more transparent framework has affected the setting of bank lending rates over three distinct periods. Our results show that responsiveness of bank lending rates to monetary policy changes improved in each period corresponding to an innovation in monetary policy transparency. Moreover, Anticipation effects in banking lending rates are evident only in the period after the RBA formalised its inflation targeting operating objective in 1996. This suggests that Banks only changed lending rates once they had learnt that the RBA was communicating a credible commitment to change the path of future short-term interest rates. However, other results show that price discrimination has been evident between the business and household sectors. To our knowledge, this analysis is the first study that looks at the issue of central bank transparency on bank lending rates.Interest rates; monetary policy; central bank transparency; vector error correction model; variance decomposition