Research Discussion Paper – RDP 2003-05 What Do Financial Market Data Tell Us about Monetary Policy Transparency?
May 2003
Abstract
This paper attempts to discern from financial market data the impact of greater monetary policy transparency over the period since the late 1980s. We examine whether interest rate variability has changed, the degree to which financial markets anticipate policy moves and movements in the yield curve at the time of changes in monetary policy. Where possible, we compare the results for Australia with other countries. We find that interest rate volatility at the short end has fallen dramatically since the late 1980s. The extent to which market participants anticipate changes in the policy rate has gradually risen, as has the speed of reaction to interest rate announcements. Since the late 1990s, bill futures contract prices have responded to the Reserve Bank of Australia's (RBA) commentaries on the economy. These results are consistent with an increase in the efficiency with which the market digests economic news. The results are quite similar across countries, and it is difficult to isolate from cross-country data any specific preferred model of monetary policy transparency.