the impact of monetary policy candidness on australian financial markets

J. of Multi. Fin. Manag. 14 (2004) 35–46

The impact of monetary policy candidness onAustralian financial markets

Dominic Gasbarroa,∗, Gary S. Monroeb

a Murdoch Business School, Murdoch University, Murdoch, 6150 WA, Australiab The Australian National University, Australia

Received 11 May 2001; accepted 6 November 2002

Abstract

In January 1990, the Reserve Bank of Australia (RBA) changed from a covert disclosure policy to anovert disclosure policy. Using a sample from January 1986 to September 2001, this paper examines thereaction of Australian financial markets to rate target changes within each of these disclosure regimes.We find significantly different announcement day responses between the two disclosure regimes forboth short-term and long-term treasury securities, and equity indices. Overall, the results indicate thatwhen monetary policy is more transparent, the market reaction is less pronounced and, therefore, weconclude that fuller disclosure of monetary policy allows investors to more optimally manage theirportfolios.© 2003 Elsevier B.V. All rights reserved.

JEL classification: E52; E58; G14

Keywords: Monetary policy; Rediscount rate; Official cash rate

1. Introduction

There are two distinct positions on how explicitly central banks should communicatemonetary policy to market participants. One group argues that the option of choosingbetween public or non-public changes to monetary policy should reside with the centralbank. The opposing group argues for a mandatory public statement of monetary policychange. This is an important issue since prior studies show that monetary policy actions of

∗ Corresponding author. Tel.:+61-893-602-126; fax:+61-893-105-004.E-mail address: [email protected] (D. Gasbarro).

1042-444X/$ – see front matter © 2003 Elsevier B.V. All rights reserved.doi:10.1016/S1042-444X(03)00037-9

36 D. Gasbarro, G.S. Monroe / J. of Multi. Fin. Manag. 14 (2004) 35–46

central banks have the ability to affect security prices in a systematic manner.1 The impactof monetary policy changes on security prices may be a function of how explicitly monetarypolicy is communicated. Different methods of communicating monetary policy may affectthe ability of market participants to value correctly their financial securities and to managetheir portfolios.

In 1985, the Reserve Bank of Australia (RBA) began managing monetary policy throughthe control of interest rates. Initially, monetary policy changed covertly and only later wasit acknowledged by central bankers “with winks and nods months after the event”.2 Duringthis covert regime, market participants had little knowledge of when an announcement mightoccur and they had to infer changes by examining the rediscount rate, which was changedirregularly.3

In January 1990, the RBA decided to publicize changes in monetary policy. At thattime, the RBA announced that it would meet on a particular day each month and the nextday would release a press statement specifying the official cash rate target.4 In addition,the press release would indicate the logic behind that target. Therefore, during this periodmarket participants knew ex ante when an announcement might occur, and the only uncer-tainty was the magnitude of any change. This change in communication policy permits aunique opportunity to investigate the impact of differential information of changes in theadministered interest rate target on the Australian financial market.

This study examines the impact of RBA target rate changes on security prices. RBAintervention was occurring during both regimes, and it is reasonable to assume market par-ticipants observed the same economic indicators as the RBA. As market conditions change,the likelihood of a change in interest rates increases, and participants adjust their portfoliosto reflect these expectations. This rebalancing occurs over time and in an orderly fashiononly if they know when an announcement is forthcoming. If their expectations are ultimatelyrealized, their portfolios require little or no rebalancing, and we expect no statistically sig-nificant announcement effect. However, if the anticipation is not completely accurate or ifthe RBA is revealing new private information, portfolios may require substantial rebalanc-ing, and we will observe an announcement effect.5 Timing is critical. If market participantsdo not knowwhen the RBA will announce rate changes, more pronounced reactions tochanges would occur.

For example, suppose economic conditions are changing and market participants expectthe RBA to increase short-term rates by 25 basis points. As a market participant, we contin-ually rebalance our portfolio to reflect our expectations. If we know the day the RBA willannounce any changes, we know our expectations will or will not be confirmed on that day.

1 See, for example,Roley and Troll (1984), Smirlock and Yawitz (1985), Thornton (1986, 1994), Cook andHahn (1988, 1989), Dueker (1992), Carlstrom (1995), Nilsen (1996)andJensen et al. (1996).

2 The Australian Financial Review (AFR)(1 March 1990).3 According to the AFR, the rediscount rate is “a useful tool in determining the outlook for interest rates” (6

November 1986). The Australian rediscount rate is equivalent to the US discount rate, which is the lending rate thatthe federal reserve banks charge depository institutions from the discount window.Goodfriend (1991)provides adetailed treatment of how the discount window operates in the US.

4 The equivalent rate in the US is the federal funds rate, which is the intra banks’ overnight lending rate.5 RBA private information possibly includes knowledge of each individual bank’s current loan portfolio and

future loan demands. Individual banks do not have this confidential information about the other banks.

D. Gasbarro, G.S. Monroe / J. of Multi. Fin. Manag. 14 (2004) 35–46 37

Optimization of our portfolio should occur at that time. However, if we do not know whenthe RBA will make the 25 basis point adjustment, our portfolio is more likely to be lessthan optimal on the inferred announcement date.6 Therefore, release of this information ne-cessitates larger portfolio adjustments. With this in mind, we expect a larger announcementeffect for changes during the covert period.

A change in the interest rate target by itself is an incomplete signal because it does notclearly communicate the resolve of the central bank to manage inflation. Central bank actionnot only influences market interest rates, but also inflation expectations. Previous researchon administered rate changes neglects the contribution that real interest rate and inflationrate components have on treasury instruments with different maturities. We address thisissue by recognizing that real interest rates drive the effect of central bank administeredtarget rate changes on short-term treasury securities. Both real interest rates and inflationexpectations drive the effect on long-term treasury securities.

Most prior research uses US data to examine the impact of central bank rate target changeson financial securities. However, there is limited research as to whether the results of USstudies are generally applicable. Australian financial market results may differ from the USbecause of the different institutional structure of the RBA.7

2. Prior research

Central banks do not generally reveal their monetary policies directly, thus market par-ticipants must interpret changes in central banks’ administered interest rates as a signalof monetary policy change. Several alternative “announcement effect” hypotheses of whymarkets respond appear in the literature (e.g. seeThornton, 1986, 1998). The most popularargument is that changes in the discount and federal fund rates signal a change in actualor future monetary policy. Another variant of the “announcement effect” hypothesis is thatdiscount and federal fund rate changes are administrative actions of a central bank that isin a unique position to judge the course of economic activity or interest rates, regardlessof whether it is responsible for that course. The efficient market version of the “announce-ment effect” hypothesis maintains that markets react only to the new information. Thus,anticipated rate changes produce no market reaction.

Jensen et al. (1996)extend theFama and French (1989)security valuation model byincorporating monetary policy with business conditions. They use discount rate changesto proxy monetary policy while business conditions are proxied by dividend yields, termpremiums and default premiums. Jensen et al. report that equity returns are significantlyhigher (lower) during expansionary (restrictive) monetary policy periods. In addition, they

6 Prather and Bertin (1998)illustrate a market timing strategy where a US Federal fund discount rate changesignals the need for portfolio rebalancing. They show a simple trading rule of entering the market on an initialdiscount rate decrease and exiting the market on an initial discount rate increase produces returns that exceed abuy-and-hold strategy.

7 The procedures for discount rate change initiation in the US and Australia are different. SeeMcNees (1993)for a description of the US system andDotsey (1991)for a comparison of the pre-1990 Australian and US systems.Carmichael and Harper (1995)provide a description of the Australian system.


indicate that dividend yields and default spreads explain significant variation in equity re-turns in expansive periods, but in restrictive periods, none of the proxies provides significantexplanation. Though the statistics are not as strong, they also indicate that bond returns dif-fer across monetary policy periods. Overall, they provide evidence that both monetary andbusiness conditions affect equity and bond returns.

Prior research focuses on examining the announcement effect on both debt and equityinstruments. For debt instruments, with contractual cash flows, the effect of a rate changefocuses on the cost of funds. While using treasury instruments eliminates the need for riskadjustment in the cost of funds, there is still the problem of decomposing a nominal interestrate into its real and inflationary components.Mishkin (1990a)finds that for treasury billmaturities of 6 months or less, the nominal term structure reveals significant informationabout the real interest rate term structure. That is, for short-term nominal interest rates,changes in real interest rates drive the impact of changes to the administered rate targetbecause the inflation rate changes slowly while short-term rates change quickly. EarlierUS research finds that changes in administered rate targets result in similar changes inshort-term treasury bill yields.

Mishkin (1990b)reports that treasury bonds with a maturity of 1–5 years provide in-formation about future inflation. Similarly,Campbell and Ammer (1993)andBorio andMcCauley (1996)concur that long-term bond yields vary primarily in response to changinginflation expectations. Therefore, as the maturity of the treasury security increases, expecta-tions of future inflation drive the valuation of the financial instrument. Longer term treasuryyields move less for given changes in federal funds rates and discount rates. A movementin the opposite direction is a sign of a credible monetary policy.

A number of event studies using US data generally support the notion that central bankshave the ability to influence short-term nominal market interest rates in a systematic manner.In general, these studies suggest that federal funds rates, discount rates and treasury yieldsmove together, with longer term treasury yields moving less for given changes in federalfunds rates and discount rates.8

Research has also examined the impact of interest rate changes on equity securities. Inthe simplest form, administered rate target changes influence both the expected cash flowsof a firm and the appropriate risk adjusted cost of capital and, therefore, the equity value.Since only the equity value is observed, it is unclear whether the cash flows or cost of capitaldominates the evaluation. In addition, since the cost of capital incorporates real interest ratesand expected inflation rates, an under-identification problem emerges. Notwithstanding thisproblem, research byWaud (1970), Smirlock and Yawitz (1985), Hardouvelis (1987), andJensen and Johnson (1993, 1995)into discount rate and federal funds rate target changes inthe US, invariably confirm an inverse relationship between administered rate changes andequity returns.9 More recently,Chen et al. (1999)examine the issue using intra-day data and

8 Cook and Hahn (1989), Thorbecke and Alami (1994), Thorbecke (1997), Nilsen (1996)examine the impactof changes in federal funds rate target on different maturity treasury instruments.Cook and Hahn (1988), Thornton(1982, 1986, 1994), Smirlock and Yawitz (1985), Hakkio and Pearce (1992)andDueker (1992)examine the impactof discount rate changes on different maturity treasury instruments.

9 Typical anecdotal evidence suggesting an association appears in AFR reports like “Stock soar after RBAslashes discount rate 1 pc” (17 May 1991) or “Rate cuts give stocks wild ride but All Ords higher” (7 May 1992).


they confirm that the Dow–Jones industrial index returns react inversely and significantlyto unexpected discount rate changes.

Although scarce, there is research into the impact of central bank administered target ratechanges in non-US markets. For example,Kliman (1974)reports a significant announce-ment effect on equities for increases in the Bank of Canada’s administered lending rate.However, a decrease in the bank rate does not elicit a significant response.Neumann andWeidmann (1998)examine the German markets and report interest rates respond signifi-cantly to changes in unanticipated Deutsche Bundesbank’s discount rate changes. There isno Australian research directly examining the impact of changes in institutional interest ratetargets on security returns and yields.Campbell and Lewis (1998)find yields on treasurybill and bond futures respond to monetary policy and inflation announcements.

3. Data and methodology

3.1. Data

We utilize several dependent variables to represent debt yield and equity returns. To sepa-rate the effect of nominal interest rate changes into real and inflation components, we inves-tigate the impact of rate changes on both short-term and long-term debt instruments. Threeinstruments, 30-, 90- and 180-day bank accepted bills represent short-term debt. Ten-yeartreasury bonds represent long-term debt instruments. We examine three different indices be-cause interest susceptible industries react differently to rate change announcements. Theseare the All Ordinaries Index (a proxy for the broad market index), the Transport Index, andthe Banks and Finance Index.10

Changes in the rediscount rate during the covert disclosure regime and the official cash rateduring the overt disclosure regime act as signals of monetary policy changes. Accordingly,we use them as the independent variable. The official cash rate changes are available underboth disclosure regimes. However, during the covert disclosure regime the official cash ratewas continuously changing and, therefore, gave no indication of monetary policy change.11

During the overt disclosure regime, the official cash rate changed infrequently and in discreteincrements. Changes in the rediscount rate paralleled changes in the official cash rate duringthe overt disclosure regime, but the RBA stopped publishing the rediscount rate in July 1993because the rediscount rate was tied to the official cash rate.

The data spans the period 1 January 1986 through 5 September 2001.Table 1provides abroad summary of the absolute size of the target rate changes that occurred during both thecovert (January 1986 through December 1989) and overt (January 1990 through September2001) disclosure regimes.Fig. 1 presents a graph of the RBA administered rate targetsduring this period.

10 The work ofWaud (1970), Kliman (1974), Pearce and Roley (1985), Smirlock and Yawitz (1985), Hafer(1986), Hardouvelis (1987)andJensen and Johnson (1993, 1995)supports the use of the market index.Hafer(1986)andJensen and Johnson (1993, 1995)also use a finance index. In addition, Hafer explores the impact ofdiscount rate changes on the transport and utilities indexes.

11 SeeCarmichael and Harper (1995).


Table 1Absolute size of rediscount and official cash rate target changes

Disclosure regime andsample period

n Rediscount rate and official cash rate changes (in basis points BP)

≤25BP

>25 BP≤50 BP

>50 BP≤75 BP

>75 BP≤100 BP

>100 BP Mean BP

Total sample January1986 to September2001

89 25 46 4 11 3 46

Covert disclosureregime January 1986to December 1989

56 18 34 2 0 2 35

Overt disclosureregime January 1990to September 2001

33 7 12 2 11 1 66

During the covert disclosure regime, the rediscount rate ranged from 19 to 12.5% andthere were 56 rediscount rate target changes (31 decreases and 25 increases). From 1 January1986 to 31 December 1987, with three exceptions, the rediscount rates declined. Increases tothe rediscount rate commenced in mid-1988 and continued until December 1989. Changesto the rediscount rate ranged from 10 to 200 basis points with a mean of 35 basis points,and the time separation between the changes ranged from 1 day to 8 months.

During the January 1990 to September 2001 period, 33 official cash rate target changesoccurred (25 decreases and 8 increases), and the official cash rate ranged from 18 to 4.75%.Changes in the target rate ranged from 25 to 150 basis points, with a mean of approximately66 basis points, and the time separation between the changes ranged from 1 to 20 months.During this overt regime, there were a few large changes during the first 5 years and several

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

1/01

/198

6

1/01

/198

7

1/01

/198

8

1/01

/198

9

1/01

/199

0

1/01

/199

1

1/01

/199

2

1/01

/199

3

1/01

/199

4

1/01

/199

5

1/01

/199

6

1/01

/199

7

1/01

/199

8

1/01

/199

9

1/01

/200

0

1/01

/200

1

RB

A A

dmin

iste

red

Tar

get R

ate

(%)

Covert RegimeRediscount Rate

Overt RegimeOfficial Cash Rate

Time

Fig. 1. RBA administered rate target changes January 1986 through September 2001.


small changes during the last 7 years. In both disclosure regimes, the rate target changes werehighly persistent and seldom quickly reversed, supporting the RBA’s aim not to “whipsawthe market.” This is similar to the US Federal Reserve’s federal funds targeting policy.

3.2. Methodology

This study employs an event study methodology with an announcement period of 1 day.12

The univariate regression used in this study, which represents the “aggregated” model, is:

�Rit = α + (β)(�RATEt) + εt (1)

where �Rit is the percentage change in the relevant yield for debt securities or return forstock prices observed on announcement day t of a rediscount/official cash rate target changeand is measured from the close of day t − 1 to the close of day t. �RATEt is the percentagechange in the rediscount or official cash rate announced at day t.13

We examine the interaction of changes in the rediscount rate and official cash rate targetswith the candidness of monetary policy disclosures by performing the following regressionfor the disclosure regime model:14

�Rit = α + β1(COVERTt)(�RATEt) + β2(OVERTt)(�RATEt) + εt (2)

where COVERTt is a dummy variable equal to 1 in the covert disclosure regime and 0 inthe overt disclosure regime, OVERTt the dummy variable equal to 1 in the overt disclosureregime and 0 in the covert disclosure regime, �RATEt the percentage change in the redis-count or official cash rate announced at day t for the covert and overt disclosure regimes,respectively, and εt is the random error term.

4. Results

Table 2 reports the announcement day effects for the aggregated and disclosure regimemodels. Panel A of Table 2 shows that RBA administered target changes positively affectsshort-term bank accepted bills. For both the aggregated model and the disclosure regimemodel, the coefficients on the short-term treasuries are highly statistically significant (P <

0.01). However, the announcement day coefficient for the 10-year treasury bonds is notsignificant. These results are consistent with prior empirical research, including those of

12 Similar studies include Waud (1970), Roley and Troll (1984), Pearce and Roley (1985), Smirlock and Yawitz(1985), Hafer (1986), Thornton (1986), Hardouvelis (1987) and Cook and Hahn (1988). Thorbecke and Alami(1994) also use a 1-day event window to investigate the impact of federal fund rate changes on equity returns.

13 Researchers have used a number of different methods to calculate the rate of return for treasury instruments.Jensen and Johnson (1995) designate the change in interest rate as the difference between rate (yield) at the closeof market on the t-day and rate (yield) at the close of the previous day (t − 1) divided by the rate (yield) at theclose of the previous day. Thornton (1986) and Cook and Hahn (1988) use the 1-day basis change in the marketinterest rate. Smirlock and Yawitz (1985) use both the percentage and basis change and reported no discernibledifference.

14 Jensen and Johnson (1993) use a similar equation to explore the simultaneous impact of discount directionalchange and the motivation for the change.


Table 2Announcement day impact of RBA administered rate target changes on treasury securities and equity indices

Security Aggregated (Eq. (1)) Covert vs. overt disclosure regimes (Eq. (2)) Chowtest(2,85)

�RATE(t-value)

F(1,87)

AdjustR2

Covertdisclosure�RATE

Overtdisclosure�RATE

F(2,86)

AdjustR2

Panel A: treasury securitiesBAB30 0.40a (9.29) 86.32 0.49 0.55a (5.07) 0.38a (8.01) 44.80 0.50 1.25BAB90 0.26a (6.62) 43.78 0.33 0.52a (5.62) 0.21a (5.15) 28.90 0.39 5.88a

BAB180 0.22a (5.42) 29.34 0.24 0.54a (5.71) 0.16a (3.86) 23.67 0.34 8.93a

TB10 −0.01 (−0.12) 0.02 0.00 0.04 (0.80) −0.01 (−0.48) 0.44 0.00 3.69b

Panel B: equity indicesAOI −0.02 (−0.93) 0.86 0.00 −0.14a (−2.84) 0.00 (0.18) 4.05 0.06 3.92b

TPI 0.01 (0.29) 0.08 0.00 −0.17b (−2.61) 0.04 (1.45) 4.48 0.07 4.39b

BKI −0.01 (−0.54) 0.29 0.00 −0.13b (−2.16) 0.00 (0.33) 2.38 0.03 2.55c

See Eqs. (1) and (2); �RATE, change in rediscount rate/official cash rate target; BAB30, 30-day bank acceptedbill; BAB90, 90-day bank accepted bill; BAB180, 180-day bank accepted bill; TB10, 10-year treasury bond; AOI,All Ordinaries Index; TPI, Transport Index; BKI, Bank Index.

a <1%.b <5%.c <10%.

Smirlock and Yawitz (1985), Cook and Hahn (1989), and Thorbecke and Alami (1994). Thefact that long-term treasury yields move less than the short-term treasury yields for givenchanges in interest rates is consistent with the inflation expectations argument presented byCampbell and Ammer (1993) and Borio and McCauley (1996).

We performed regression analyses to determine whether the candidness of the overt dis-closure regime yields different information than that of the covert disclosure regime. Theresults for the Chow test, panel A, Table 2, reveal that announcement day response co-efficients in the covert disclosure regime are significantly larger than the correspondingresponse coefficients in the overt disclosure regime for the 90-day and 180-day bank ac-cepted bills and the 10-year treasury bonds. This suggests that the less information availableto market participants, the greater the portfolio adjustment that must take place when RBAinformation is revealed.

Panel B of Table 2 provides evidence of the influence of RBA administered rate targetchanges on equity returns.15 The results for the aggregated model are not significant. Forthe covert disclosure regime, a change in the rediscount rate generates a significant responsein the opposite direction.16 A change in the official cash rate during the overt disclosureregime elicits no significant reactions in the equity indices. Chow tests confirm that the

15 We also analyze the data using a 2-day announcement period to ensure that we capture the total reaction inthe stock market. The results are similar to those reported in Table 2 and, therefore, we believe that the stocksincluded in these equity indices were not affected by infrequent trading.

16 This result is similar to studies by Pearce and Roley (1985), Smirlock and Yawitz (1985) and Hafer (1986)on the impact of discount rate changes and Thorbecke and Alami (1994) on the changes of federal funds target onequity returns.


Table 3Non-parametric analysis of announcement day impact of RBA administered rate target changes on treasury secu-rities and equity indices

Security Spearman rank correlation coefficients for the correlation between RBA administeredrate changes and treasury yield and equity return reactions

Aggregated(n = 89)

Covert disclosureregime (n = 56)

Overt disclosureregime (n = 33)

Panel A: treasury securitiesBAB30 0.67a 0.60a 0.41b

BAB90 0.56a 0.53a 0.38b

BAB180 0.45a 0.43a 0.28TB10 0.07 0.06 −0.21

Panel B: equity indicesAOI −0.09 −0.31b 0.17TPI 0.06 −0.33b 0.38b

BKI −0.05 −0.28b 0.09

BAB30, 30-day bank accepted bill; BAB90, 90-day bank accepted bill; BAB180, 180-day bank accepted bill;TB10, 10-year treasury bond; AOI, All Ordinaries Index; TPI, Transport Index; BKI, Bank Index.

a <1%.b <5%.

response coefficients during the covert disclosure regime are significantly greater than theresponse coefficients during the overt disclosure regime. This result is consistent with ourexpectation that a change in RBA administered rates during a covert disclosure regimewould elicit equity security return responses of a different magnitude than a correspondingchange in RBA administered rates during an overt disclosure regime.

Because our sample is relatively small (n = 89) and there are a few large administeredrate changes (i.e. 3 observations greater than 100 basis points and 11 observations of 100basis points) parametric tests may lead to biased results. Therefore, we also performednon-parametric tests. Table 3 presents the results of a non-parametric analysis. We calculatedSpearman rank correlation coefficients for the relation between RBA administered ratechanges and treasury yield and equity return reactions. In general, the non-parametric testssupport the results reported in Table 2. However, the levels of significance are lower for theovert regime and the 180-day bank accepted bills is statistically insignificant. Unexpectedly,the correlations between the rate change and the equity indices are positive during the overtperiod.

In an attempt to explain the different responses between disclosure regimes, we examinedthe AFR. During the covert disclosure period, the AFR reported less than 10 press state-ments made by the Governor of the Reserve Bank. By comparison, regularly announcedpress statements and official press releases occurred during the overt disclosure regime. Inaddition, moral suasion in the overt disclosure period is clearly evident in press statementsand official press releases, as is the persistent signaling that the RBA wanted to contain in-flation, especially during the 1990–1995 period. A survey conducted by the AFR during themid-1990s indicates that the business community credibly viewed the anti-inflation policyand the 2–3% medium-term inflation target.


5. Conclusions

This study examines the reaction of financial securities to rediscount and official cashrate target changes in Australia. Consistent with prior US research, we find that RBA ad-ministered rates and treasury yields move together, with longer term treasury yields movingless for given changes in RBA administered rate targets. We also find significantly differentannouncement day responses between the two disclosure regimes for both short-term andlong-term treasury securities.

Previous research on federal funds rate and discount changes neglects the dissimilarcontribution that real interest and inflation rate components have on treasury instrumentswith different maturities because information about inflation expectations was not explicitlystated in announcements by central banks. Real interest rates drive the effect of rate changeson short-term treasury securities whereas both real rates and inflation expectations drive theeffect on long-term treasury securities.

Changes in the RBA administered rates during the covert disclosure regime elicit signif-icant negative reactions in the equity markets. A change in the official cash rate during theovert disclosure regime elicits no significant reaction in the equity markets. The responsecoefficients during the covert disclosure regime are statistically significantly greater thanthe response coefficients during the overt disclosure regime. These results suggest the equitymarkets are not as surprised by RBA announcements during the overt period.

Recent US research reveals that business and monetary conditions and their interactioninfluence both equity and bond returns. Accordingly, investors must use business and mon-etary conditions to formulate and manage their portfolios. We find that when monetarypolicy is more transparent, the market reaction is less pronounced and, therefore, we con-clude that fuller disclosure of monetary policy allows investors to more optimally managetheir portfolios.

Acknowledgements

We would like to thank Tim Brailsford, Philip Brown, George Pennacchi, Kathie Sullivan,David Woodliff, Kent Zumwalt and the anonymous reviewer for their helpful commentsand suggestions.

References

Borio, C.E.V., McCauley, R.N., 1996. The Economics of Recent Bond Yield Volatility, Bank for InternationalSettlements, Economic Papers 45.

Campbell, J.Y., Ammer, T., 1993. What moves the stock and bond markets? A variance decomposition for long-termasset returns. Journal of Finance 48 (1), 3–37.

Campbell, F., Lewis, E., 1998. What Moves Yields in Australia? Research Discussion Paper Reserve Bank ofAustralia, 9808.

Carlstrom, C.T., 1995. A Monetary Policy Paradox: Economic Commentary. Federal Reserve Bank of Cleveland.Carmichael, J., Harper, I.R., 1995. Implementing monetary policy in a deregulated financial system: a study of

the Australian official short-term money market. Pacific-Basin Finance Journal 3 (4), 409–428.


Chen, C.R., Mohan, N.J., Steiner, T.L., 1999. Discount rate changes, stock market returns, volatility, and tradingvolume: evidence from intraday data and implications for market efficiency. Journal of Banking & Finance23, 897–924.

Cook, T., Hahn, T., 1988. The information content of discount rate announcements and their effect on marketinterest rates. Journal of Money, Credit and Banking 20 (2), 167–180.

Cook, T., Hahn, T., 1989. The effect of changes in the Federal funds rate target on the market interest rates in the1970’s. Journal of Monetary Economics 24 (3), 331–352.

Dotsey, M., 1991. Open market operations in Australia: a US perspective. The Economic Record 67 (9), 243–256.Dueker, M.J., 1992. The response of market interest rates to discount rate changes. Review: Federal Reserve Bank

of St. Louis 74 (4), 78–91.Fama, E., French, K.R., 1989. Business conditions and expected returns on stocks and bonds. Journal of Financial

Economics 25, 23–49.Goodfriend, M., 1991. Interest rates and the conduct of monetary policy. Carnegie–Rochester Conference Series

on Public Policy 34, pp. 7–30.Hafer, R.W., 1986. The response of stock prices to changes in weekly money and the discount rate. Review: Federal

Reserve Bank of St. Louis 68 (3), 5–14.Hakkio, C.S., Pearce, D.K., 1992. Discount rate policy under alternative operating procedures: an empirical

investigation. International Review of Economics and Finance 1 (1), 55–72.Hardouvelis, G.A., 1987. Macroeconomic information and stock prices. Journal of Economics and Business 39 (2),

131–140.Jensen, G.R., Johnson, R.R., 1993. An examination of stock price reactions to discount rate changes under

alternative monetary policy regimes. Quarterly Journal of Business Economics 32 (2), 26–51.Jensen, G.R., Johnson, R.R., 1995. Discount rate changes and security returns in the US, 1962–1991. Journal of

Banking & Finance 19 (1), 79–95.Jensen, G.R., Mercer, J.M., Johnson, R.R., 1996. Business conditions, monetary policy, and expected security

returns. Journal of Financial Economics 40, 213–237.Kliman, M.L., 1974. The administered bank rate and its announcement effect. Canadian Journal of Economics

7 (4), 625–641.McNees, S.K., 1993. The Discount Rate: The Other Tool of Monetary Policy, New England Economic Review.

Federal Reserve Bank of Boston, pp. 3–22.Mishkin, F.S., 1990a. What does the term structure tell us about future inflation? Journal of Monetary Economics

25, 77–95.Mishkin, F.S., 1990b. The information in the longer maturity term structure about future inflation. The Quarterly

Journal of Economics 105, 815–828.Neumann, M.J.M., Weidmann, J., 1998. The information content of German discount rate changes. European

Economic Review 42, 1667–1682.Nilsen, J.H., 1996. Borrowed Reserves, Federal Funds Rate Targets, and the Term Structure. Unpublished Working

Paper, Princeton University, Princeton, pp. 1–28.Pearce, D.K., Roley, V.V., 1985. Stock prices and economic news. Journal of Business 58 (1), 49–67.Prather, L., Bertin, W.J., 1998. The implications of discount rate changes for market timing. Review of Financial

Economics 7 (1), 21–33.Roley, V.V., Troll, R., 1984. The impact of discount rate changes on market interest rates. Economic Review:

Federal Reserve Bank of Kansas 69 (1), 27–39.Smirlock, M., Yawitz, J., 1985. Asset returns, discount rate changes and market efficiency. Journal of Finance

XL (4), 1141–1158.The Australian Financial Review, 1986–2001. Daily Issues.Thorbecke, W., 1997. On stock market returns and monetary policy. Journal of Finance 52 (2), 635–654.Thorbecke, W., Alami, T., 1994. The effect of changes in the Federal funds rate target on stock prices in the 1970’s.

Journal of Economics and Business 46 (1), 13–19.Thornton, D.L., 1982. The discount rate and market interest rates: what’s the connection? Review: Federal Reserve

Bank of St. Louis 64 (6), 3–14.Thornton, D.L., 1986. The discount rate and market interest rates: theory and evidence. Review: Federal Reserve

Bank of St. Louis 68 (7), 5–21.


Thornton, D.L., 1994. Why do T-bill rates react to discount rate changes? Journal of Money, Credit and Banking26 (4), 839–850.

Thornton, D.L., 1998. The information content of discount rate announcements: what is behind the announcementeffect? Journal of Banking & Finance 22, 83–108.

Waud, R.N., 1970. Public interpretation of Federal Reserve discount rate changes: evidence on the “Announcementeffect” . Econometrica 38 (2), 231–250.

the impact of monetary policy candidness on australian financial markets

Documents