Download transparency and credibility of monetary policy in transition countries

Roman Matoušek
TRANSPARENCY AND CREDIBILITY
OF MONETARY POLICY
IN TRANSITION COUNTRIES:
THE CASE
OF THE CZECH REPUBLIC
WP No. 37
Praha 2001
ABSTRACT
This is a study of what asset price can tell us about the evolving credibility of the
monetary policy of the Czech National Bank (CNB). From the beginning of the 1990s,
several market economies adopted direct inflation targeting (DIT). The focus of our
analysis is to examine the effect of changes in the two-week repo rate (the official
interest rate) on short and long–maturity market interest rates. Argument relies on
information asymmetry and the existence of a stationary stochastic equilibrium with full
knowledge of authorities reaction function. Only then will reaction be insignificant. Our
research found at short maturities, the coefficients for changes in the official repo rate
are lower in the DIT period than in pre-crisis period. The results are significant at the
5%-level. This implies that the hypothesis of no increase in the transparency of
monetary policy with the introduction of DIT can be rejected. We found that bond yields
and interest rate swap rates of maturities of 5 years and more did not react significantly
(at the 5%-level) to official interest rate decisions in the DIT period. This is consistent
with the hypothesis that monetary policy was credible both before and after introduction
of DIT.
The author is deeply indebted to Peter Sinclair, Richhild Moessner, and Lucjan Orlowski.
The views expressed in the paper are those of the author and not those of the Czech
National Bank.
2
Contents
1 Introduction .....................................................................................................
7
2 DIT in transitional economies .........................................................................
2.1 Inflation targeting in the Czech Republic .................................................
9
11
3 Model specification a d data sample ..............................................................
3.1 CNB´s monetary instruments ...................................................................
3.2 Methodological approach and asset price data .......................................
3.3 Data sample ............................................................................................
13
13
13
16
4 Asset price reactions to changes in the CNB´s official interest rate ..............
4.1 The effect of official interest rate changes in the pre-crisis period .........
4.2 The effect of official interest rate changes in the period of turbulence ...
4.3 The DIT period .......................................................................................
17
17
19
20
5 Interpretation and comparison of results in the different periods ..................
23
References .......................................................................................................
27
Appendix ..........................................................................................................
31
3
1 Introduction
This is a study of what asset price can tell us about the evolving credibility of the
monetary policy of the Czech National Bank (CNB). From the beginning of the 1990s,
several market economies adopted direct inflation targeting (DIT). The first country was
New Zealand (1990), followed by Canada (1991), the United Kingdom (1992), Finland
(1993), Sweden (1993), Australia (1994), Israel (1994), followed later in the decade by
Eastern European Countries; the Czech Republic (1998) and Poland (1998). The
change in the monetary strategy at the beginning of the 1990s often followed the
abandonment of either a fixed exchange rate regime as a nominal anchor (the United
Kingdom, Sweden) or a monetary aggregate as an intermediate target (New Zealand,
Canada). Since DIT has become the prevailing monetary strategy in many countries,
there has been a flood of studies analysing the pros and cons of DIT. Some empirical
studies have shown that in countries applying DIT, the transparency and credibility of
monetary policy has increased (Svensson, 1995).
However, there has been little analysis, to date, of the impact of DIT in transition
economies. The paper asks whether the introduction of DIT has increased the
4
transparency and credibility of the Czech National Bank’s (CNB) monetary policy. One
could look at this question in many ways. The focus of our analysis is to examine the
effect of changes in the two-week repo rate (the official interest rate) on short and long–
maturity market interest rates. Such an analysis allows us to test the two hypotheses
about monetary policy transparency and credibility discussed in Haldane and Read
(2000), Chadha and Ganley (1998), Muller and Zelmer (1999). Haldane and Read
(2000) show that movements at the short–end of the yield curve in response to changes
in official rates reflect the markets’ degree of uncertainty about the central bank’s
monetary policy reaction function, while movements at the long–end of the yield curve
reflect market assessment of the central bank’s credibility. The argument relies on
information asymmetry and the existence of a stationary stochastic equilibrium with full
knowledge of the authorities’ reaction function. Only then will the market reaction be
insignificant.
Our methodological approach is based on several recent studies that measure
the effect of announcements of interest rate changes on interest rates along the yield
curve (Haldane and Read (2000), Muller and Zelmer (1999), Hardy (1998)).
The paper is organised as follows. Section 2 discusses the evolution of the
conduct of monetary policy by the Czech National Bank (CNB) since 1996. We start by
discussing the appropriateness of DIT in transition economies. We focus on the
prerequisites that need to be fulfilled for successful implementation of DIT. We then
examine whether DIT in the Czech Republic fulfils the two basic prerequisites of fiscal
discipline and no another monetary anchor. Section 3 deals with the methodological
issues for testing our nexus between transparency and credibility, versus the market
uncertainty reflected in the market reactions to the CNB’s monetary decisions. Our
estimation results are presented in Section 4. Finally, we summarise our results and we
examine whether or not our hypotheses about the transparency and credibility of CNB
hold.
5
2 DIT in transitional economies
The appropriateness of DIT in transition economies is often questioned. There is
no consensus about which framework of monetary policy is most appropriate. Economic
research suggests that DIT might be the right choice in an environment of disinflation.
For example, Orlowski (2000) argues that DIT might be appropriate for the leading
transition countries (i.e., Czech Republic, Poland, Hungary). Also, DIT might be
appropriate in order to help to reduce inflation levels elsewhere in the EU. But there are
questions about whether the necessary pre-conditions for a DIT framework can be met.
First, there should be no fiscal dominance, i.e., monetary policy should not be
subordinated to accommodate a dominate fiscal policy. Second, there should be no
other nominal monetary anchors (Krzak and Ettl, 1999). This unequivocal condition
holds true only in the strict version of inflation strategy. Nevertheless, the fiscal condition
can be difficult to fulfil in transition economies. If there is a lack of fiscal discipline, the
inflationary pressure arising from the fiscal side might jeopardise the achievement of the
inflation target. As for additional policy targets, Svensson (1996), argues that inflation
targeting is not consistent with a fixed exchange rate regime, but it is compatible for
example with a target for full employment and financial stability.
6
The are several common features in the transitional trajectories of post-command
economies. First of all, at the beginning of transformation process1, all countries had to
cope with high inflation. In many cases inflation was the result of price liberalisation, the
lifting of administrated prices, the introduction of VAT and new tax policies. All these
factors were instantly mirrored in changes of price levels. In other words, at least initially,
there was a weak link between monetary policy and prices.
Central banks in transition economies, in the initial phase of the economic
transition, did not operate with a credibility that would have been a positive asset in their
effort to bring down inflation expectations. One way of reducing inflationary expectations
is to peg the domestic currency (fixed exchange rate regime). But a successful fixed
exchange rate regime requires fiscal discipline and a sufficient volume of foreign
reserves. This provides a challenge for many transition economies. Several countries
have opted instead for currency boards (Estonia, Bulgaria, Bosnia and Herzegovina).
The Central Eastern European Countries (CEECs) have used a variety of
monetary policies. After abolishing other nominal anchors, Poland and the Czech
Republic adopted inflation targeting. Hungary, on the other hand, continues to rely on an
exchange rate target, but controls on short-term capital flows provide room for
discretionary policy in terms of interest rate changes.
The question remains whether DIT is an appropriate form of monetary policy
under a flexible exchange rate in transition economies. Some economists have argued
that DIT can bring down inflation and guarantee less inflation volatility more successfully
than can targeting exchange rates (Swensson, 1997, Orlowski, 2000). In practice, it has
been difficult for CEECs to forecast future inflation and to estimate the lags in the
response of the economy to changes in monetary policy (due to data limitation). But
theory predicts that DIT can increase both transparency and credibility in transition
economies. In the following sections we try to test this statement.
1
For most Central European Countries, the transitional period started in the late 80’s and the
early 90’s.
7
2.1 Inflation targeting in the Czech Republic
In January 1998 the CNB became the first central bank in a transition country to
adopt inflation targeting. The shift to DIT was speeded up as a result of the forced
abandonment of the fixed exchange rate regime in May 1997. As for the prerequisites of
DIT that have already been mentioned, the fiscal position was broadly sound. In
addition, the CNB had a relatively high degree of independence2 and there were no
explicit nominal anchors.
Chart 1
Net inflation index and the target corridor (%)
15.00
2
10.00
0
5.00
-2
0.00
1998
1999
2000
Ja
Ja
Ja
Ja
NII
Ju
l -0
0
4
n00
20.00
Ju
l -9
9
6
n99
25.00
Ju
l -9
8
8
n98
30.00
Ju
l -9
7
10
Ju
l -9
6
Ja
n97
35.00
n96
12
2WREPO (right scale)
Source: CNB
Since the Czech economy is still in the process of price deregulation, the CNB
has adopted a net inflation index (NII) as the target variable instead of the consumer
price index (CPI). The NII is defined as the rate of increase in consumer prices,
excluding administered and regulated prices and the impact of indirect taxes. The
2
8
Recently Parliament approved a new Act that has reduced significantly CNB’s independence.
economic rationale behind this is that the CNB is only accountable for deregulated or
market prices. At the end of 1999, the Czech CPI included prices of 754 items, 18
percent of which were regulated or administered.
Net inflation in the Czech Republic declined (see Chart 1) until the second quarter
of 1997. However, it rose after the April/May 1997 crisis in the Czech capital markets,
(which was induced by corporate governance and liquidity problems in the Czech
financial sector). The financial crisis led to the decision to float the Czech currency.
A strong initial depreciation of the Czech currency renewed inflationary expectations.
Higher inflationary expectations persisted until the second quarter of 1998 and coincided
with the financial crisis in emerging markets. The CNB responded to the currency attack
by rising interest rates during 1997. It took approximately 15 months to bring down the
official interest rate to pre-crisis level (see Table1 in appendix).
The CNB adopted an inflation target to show its commitment to reach low,
sustainableinflation over the long term horizon. On December 22 1997 the CNB set
a 4.5 percent net inflation target for end 2000. The target for end 1998 was set at 6.0
percent with a 0.5 percentage point band on either side. On November 27 1998 the CNB
set a 4.5 percent target for end 1999. The band remained the same, i.e., plus or minus
50 basis points tolerance. The target for 2000 remains at 4.5 percent but there is
a tlerance band of 100 basis points on either side.
The institutional framework of the CNB’s inflation targeting regime has many of
the characteristics deemed necessary to increase transparency (see Kuttner and
Possen, 2000). For example, the CNB has a published numerical long-run goal for
monetary policy (NII 2 per cent for 2005), publishes an Inflation Report, together with the
Central Bank’s forecast and an ex-post evaluation of monetary policy and the minutes of
the banking board meetings).
9
3 Model specification and data sample
In order to test the transparency of monetary policy, one can analyse the effect of
monetary policy decisions on financial markets. The focus of our paper is to investigate
the effect of changes in the CNB’s official interest rate (2wREPO) on short- and longmaturity interest rate contracts. This analysis allows us to examine hypotheses about
the transparency of monetary policy transparency as discussed in Haldane and Read
(2000). They proposed that in a transparent monetary policy regime, short term interest
rates would anticipate to some degree changes in official rates. Also, in a credible
monetary regime, a change in official (short term) rates would not lead to a change in
long term rates, which rather reflect expectations about inflation over the longer term.
(Indeed a rise in official (short term) rates may lead to a fall in long term rates if
monetary policy results in lower expectations of inflation in the medium term). In other
words, the argument relies on information asymmetry and the existence of a stationary
stochastic equilibrium with full knowledge of the authoritie’s reaction function. Only then
will the market reaction be insignificant.
3.1 CNB’s monetary instruments
The CNB uses several monetary tools that impact on the financial market (see
Charts 1 and Table 1 in Annex). The two-week repo rate set up by the CNB is the most
important policy interest rate of the CNB. Repo operations are used to withdraw liquidity
10
from the market. Other official interest rates, such as the Lombard and discount
facilities, have, we believe, only a “psychological” role. Their spread is to some extent
only a corridor for the short-maturity yield (see Chart 2). An additional powerful monetary
instrument – compulsory reserves – has recently been significantly reduced and has
now only a marginal role.3 We therefore study the impact of the two-week repo rate on
short- and long-maturity interest rates.
Chart 2
Movement of official interest rates
60
50
40
% 30
20
10
1/
2/
1
4/ 996
3/
19
7/ 96
4/
10 199
/4 6
/1
1/ 9 96
6/
19
4/ 97
8/
1
7/ 997
9/
10 199
/9 7
/1
1/ 997
9/
4/ 199
13 8
/1
7/ 99
14 8
10 /19
/1 98
4/
1/ 199
14 8
/1
4/ 99
16 9
/
7/ 199
19 9
10 /19
/1 99
9/
1/ 199
19 9
/
4/ 200
20 0
/
7/ 200
21 0
/2
00
0
0
REPO2W
Discount rate
Lombard rate
PRIBOR3M
Source: CNB
3.2 Methodological approach and asset price data
In our study, we follow the method used by Haldane and Read (2000) taking into
account the specific characteristics of the Czech financial markets. We estimate the
following regressions:
∆ it , j = C +β j ( L)∆ it , j + β 4 ∆ itc + ε t
3
(1)
The Czech National Bank reduced reserves from 11.5 percent to 2 percent. See Table A1.
11
where j and t represent indices for the maturity of market interest rates and date
respectively. The dependent variable ∆ it , j is the daily change in market interest rates,
β j is a polynomial in the lag operator (L). These lagged dependent variables are applied
in order to deal with autocorrelation.
The independent variable ∆ itc is the daily differences of the official interest rate,
which is closely watched by the market. Thus, the coefficient β 4 measures the market
reaction to changes in the official interest rate. If changes in the official interest rate are
perfectly anticipated, then the coefficient β 4 would be equal to zero. This would be
consistent with a transparent monetary policy. We apply equation (1) to Prague
interbank offer rates (PRIBOR) of one to twelve months maturity. The CNB announces
any change to the official interest rate at around 1:00 p.m. on the day before the rate
becomes effective. PRIBOR is quoted on the same day at 11:a.m. and therefore cannot
react on the day of an announcement.
A different equation must be used to test the reaction of long maturity interest
rates to monetary policy announcements since they are quoted at close of business.
Long maturity interest rates can react to announcements of a change in the official rate
on the same date. This is because this market remains open after the CNB announces
the change in the official rate. In order to capture this market feature, the coefficient β 4
in regression 1 must be lagged 1-day, i.e., the day when the change is announced but
not yet effective to test for the reaction of long term interest rates to official rate changes.
∆ it , j = C +β j ( L)∆ it , j + β 4 ∆ itc−1 + ε t
(2)
We analyse the following dependent variables: daily differences in swap interest
rates of one to ten years maturity (Swap1Y to Swap10Y); and daily differences in
government benchmark bonds of 2 and 5 years maturity (GB2Y and GB5Y). Because of
a lack of data for swap interest rates from January 1996 to August 1997, we use the
bond price indices (GBPI and GMPI) constructed by Ceska sporitelna (the Czech
savings bank). These indices were launched to track price movements in the
government and corporate markets respectively. They serve as benchmarks for highly
12
liquid instruments. We also test the reactions of the daily changes of the exchange rate
CZK/EUR to the official interest rate.
We use the Newey-West method for estimating equations, while gives standard
errors adjusted for autocorrelation and heteroscedasticity.
3.3 Data sample
Our sample consists of daily data on short- maturity yields from 2nd January 1996
to 31st August 2000, i.e., 1046 observations.
We have a complete data sample for the short-maturity yield, i.e., 1, 3, 6, and 12
months PRIBOR, and also for the exchange rate, GBPI and GMPI. The swap interest
rates data series start on 25th September 1996; the government bond data start on 8th
October 1997. This still gives us a large number of observations.
Because of high volatility in the dependent variables (see Table 1), caused by
both transitional effects and exogenous factors we divide the sample into three sub–
samples. The first period includes data from 2nd January 1996 to 31st March 1997 which
is the period predating the financial crises. The second period, from 1st April 1997 to 31st
December 1997 then covers an interval of financial turbulence that the Czech financial
markets had to withstand. This sub–sample contains 250 observations. From April 1997
to December 1997 there were 30 changes in the official repo rate. The high number of
changes may reflect the authorities’ concern to ensure a “soft landing” for the economy
while preventing another speculative attack on the Czech koruna (see Dedek 2000). The
third period, the period of DIT, includes data from 1stNovember 1998 to 31st August
2000. The number of observations is 448 and there were nineteen changes in the official
interest rate.
Table 1
Average volatility (standard deviation) of PRIBOR
Pre-crisis
Crisis
DIT
Pribor 1M
0.017
0.85
0.048
Pribor 3M
0.023
0.566
0.0475
Pribor 6M
0.025
0.42
0.053
Pribor 12M
0.027
0.32
0.05
13
4 Asset price reactions to changes in
the CNB’s official interest rate
4.1 The effect of official interest rate changes in the
pre-crisis period
First, we estimated the regressions for the period before DIT and the financial
crises, from 1st January 1996 to 31st March 1997. During this period, the CNB used a
monetary aggregate as an intermediate target, and the exchange rate as a nominal
anchor. The CNB changed its official interest rate only five times during this period.
Table 2 shows that the coefficients for changes in the CNB’s official repo rate have large
values of about 1, and are significant at the 1 percent level for money market interest
rates (PRIBOR) with maturities of 1 to 12 months. This strong reaction in short-term
market interest rates of 104 percent to 122 percent of the change in the official interest
rate is consistent with the hypothesis of a low level of transparency in the Czech
National Bank’s monetary policy reaction function. The large reaction of PRIBOR on the
day when new official interest rates become effective can also be seen in Chart 1 in the
appendix.
14
Table 2
The Effect of official interest rate changes on short interest rates
(January 1996– March 1997)
Maturity
PRIBOR1M
PRIBOR3M
PRIBOR6M
PRIBOR12M
β4
1.04**
1.18**
1.19**
1.218**
R2
0.67
0.59
0.54
0.48
D-W
1.70
1.65
1.63
1.62
** indicates significance at 1%,
*indicates significance at 5%,
+ indicates significance at 10%
Data on bond yields and swap interest rate are not available in this period and we
therefore study instead the reactions of log-differences in a price index of government
bonds (GBPI) and of a price index of corporate bonds (CBPI), constructed by the Czech
savings bank4. The results are shown in Table 3. The estimated coefficient β 4 for the
impact of changes in the official repo rate are negative5 and close to zero for both bond
price indices. For the government bond price index, the coefficient β 4 is statistically
significant at the 1 percent level.
We also investigated the effect of changes in the official repo rate on logdifferences of the exchange rate. The estimated coefficient is low and not significant in
this first period, i.e. changes in the official repo rate had only a marginal effect on the
exchange rate. This is likely to reflect the fact that this period was characterised by a
fixed exchange rate regime with a narrow band of ± 7.5% .
4
Both bond price indices were established by the Czech savings bank (Ceska sporitelna) in
January 1994, as described in the Section 3.2.
5
Note that a fall in the price indices corresponds to an increase in yields.
15
Table 3
Maturity
GBPI
CBPI
CZK/EUR
Asset price reactions to changes in the official repo rate
(January 1996– March 1997)
β4
R2
D-W
-0.013**
0.188
2.05
-0.015
0.13
2.06
-0.002
0.006
1.98
** indicates significance at 1%,
*indicates significance at 5%,
+ indicates significance at 10%
4.2 The effect of official interest rate changes in the period of
turbulence
In the turbulent period of the financial market crisis from April 1997 to December
1997, the coefficients for changes in the official interest rate at the short-maturity
contracts are not significant, and their magnitude is lower than in the previous period, as
Table 4 shows.
Table 4
The effect of official interest rate changes on short-term interest rates
(April 1997- December 1997)
β4
Maturity
R2
D-W
PRIBOR1M
-0.13
0.05
0.05
PRIBOR3M
0.07
0.15
2.05
PRIBOR6M
0.027
0.16
2.01
PRIBOR12M
-0.006
0.19
1.98
**indicates significance at 5%,
* indicates significance at 1%,
+ indicates significance at 10%
For this period we also estimate the effect of official interest rate changes on the
long maturity bond and swap rates. The magnitudes of coefficients are low and not
statistically significant, except for the 2 year government bond yield (see table 5).
16
Table 5
Maturity
SWAP1Y
SWAP2Y
SWAP5Y
SWAP10Y
GB2Y
GB5Y
CZK/EUR
Asset price reactions to changes in the official repo rate
(April 1997 - December 1997)
β4
R2
D-W
0.008
0.049
2.03
0.015*
0.02
1.73
0.005
0.018
1.92
0.004
0.06
1.85
-0.05
0.04
2.14
0.002
0.026
2.02
-0.002
0.06
2.00
** indicates significance at 1%,
*indicates significance at 5%,
+ indicates significance at 10%
4.3 The DIT period
DIT has been in operation since 1st January 1998. Our third period runs from then
until August 31 2000. The coefficients of the official interest rate for PRIBOR rates are
lower than in the first period (see Table 6), and all are statistically significant at the 1
percent level. These results for the short-end of the yield curve are consistent with the
hypothesis that there was an increase in the transparency of CNB monetary policy
compared with pre-DIT and the pre-crisis period.
Table 6
The effect of official interest rate changes on short-term interest rates
(January 1998- August 2000)
β4
Maturity
R2
D-W
PRIBOR1M
0.45**
0.51
2.04
PRIBOR3M
0.26**
0.31
2.05
PRIBOR6M
0.21**
0.4
2.04
PRIBOR12M
0.16**
0.16
1.99
** indicates significance at 1%
* indicates significance at 5%
+ indicates significance at 10%
17
Results for the reaction of bond yields and interest rate swaps to changes in
official rates are presented in Table 7. The coefficients are positive and statistically
significant at the 5 percent level for swap rates of one and two years maturity. None of
the other coefficients is statistically significant.
Table 7
Asset price reactions to changes in the official interest rates
(January 1998- August 2000)
Maturity
β4
R2
D-W
SWAP1Y
0.06*
0.11
2.01
SWAP2Y
0.10*
0.03
2.07
SWAP5Y
0.08
0.04
2.02
SWAP10Y
0.05
0.02
2.02
GB2Y
0.02
0.003
2.02
GB5Y
0.07+
0.06
2.01
CZK/EUR
-0.15*
0.01
2.00
** indicates significance at 1%,
* indicates significance at 5%,
+ indicates significance at 10%
Changes in the official interest rate have a statistically significant effect at the
5 percent level on the exchange rate and the coefficient is negative. The reaction is
significant at the 5 percent level.
18
5 Interpretation and comparison of
results in the different periods
At short maturities, the coefficients for changes in the official repo rate are lower
in the DIT period than in pre-crisis period. Table 8 and Chart 3 show the 95% confidence
intervals for the coefficients in each period for maturities of one to twelve months. As we
can see, the confidence intervals do not overlap. The results are significant at the 5%
level. This implies that the hypothesis of no increase in the transparency of monetary
policy with the introduction of DIT can be rejected at the 5 percent level.
Table 8
Confidence intervals of coefficients for official interest rate decisions
before and during DIT
January 1996 to March 1997
January 1998 – August 2000
1-month PRIBOR
[ 0.995,1.084 ]
[0.274, 0.625]
3-month PRIBOR
[1.106, 1.267]
[0.099, 0.420]
6-month PRIBOR
[1.267,1.118]
[0.057,0.362]
12-month PRIBOR
[1.135, 1.304]
[0.015, 0.304]
During the period of financial market crisis, we found that short-term interest rates
did not react significantly to changes in the official repo rate. The absence of a
19
significant response to official interest rate decisions on the day of the change in rates is
consistent with the hypothesis that these changes were anticipated by the market, and
thus that monetary policy was transparent during that period. However, since short-term
market interest rates were very volatile in the financial crisis period (as shown in Table
1), an alternative explanation is that the properties of the time series of interest rates
(e.g. heteroscedasticity) might lead to greater problems in the econometric estimation
during that period, and perhaps a bias in the estimated coefficients and their standard
errors. It is also possible that short-term interest rates exhibited a delayed reaction to
monetary policy decisions, or that they were affected to a greater extent by other factors,
which might have become more important in the financial market crisis.
We found that bond yields and interest rate swap of maturities of 5 years and
more did not react significantly (at the 5%-level) to official interest rate decisions in the
DIT period. The price index for government bonds considered here showed a small
reaction (with a coefficient of –0.013) in the pre-DIT and pre-crisis period6. This is
consistent with the hypothesis that monetary policy was credible both before and after
introduction of DIT. But the absence of a significant reaction of long-maturity yields on
the day of the changes in official interest rates might also be due to other factors. In
particular, there might be a delayed transmission of changes in official interest rates
along the yield curve.
Also the expectation theory of the yield curve might not yet hold in the short term,
so that there is no immediate reaction to official interest rate changes (see Haldane and
Read, 2000). Moreover, properties of the time series of yield changes, including
heteroscedasticity, might prevent an accurate estimation of the coefficients and standard
errors. Also, factors other than interest rate expectations might have a distorting effect
given the low liquidity of the market.
6
But note that this is a coefficient for log-differences in a price index, rather than a yield.
20
Chart 3
Short term interest rates (PRIBOR) responses to the 1% change
in official interest rate
1.4
1.2
Pre-DIT
1
0.8
0.6
DIT
0.4
0.2
0
0
3
6
9
12
21
References
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Cambell, J., Y., (1999) “Asset Prices, Consumption, and the Business Cycle”, in
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B.V., pp.1231-1303
4.
Campbell, F., and E., Lewis,(1998) “What Moves Bond Yields in Australia ?”,
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24
Appendix
25
Table 1
the official interest (%)
11.50
11.60
11.80
12.40
29.3.1996
29.4.1996
9.5.1996
21.6.1996
1.8.1996
8.5.1997
16.5.1997
27.5.1997
4.6.1997
11.6.1997
18.6.1997
20.6.1997
23.6.1997
24.6.1997
27.6.1997
30.6.1997
1.7.1997
7.7.1997
8.7.1997
9.7.1997
16.7.1997
22.7.1997
23.7.1997
24.7.1997
28.7.1997
1.8.1997
4.8.1997
31.10.1997
1.12.1997
2.12.1997
3.12.1997
4.12.1997
9.12.1997
10.12.1997
17.12.1997
23.1.1998
20.3.1998
17.7.1998
30.7.1998
14.8.1998
25.9.1998
27.10.1998
13.11.1998
4.12.1998
23.12.1998
18.1.1999
28.1.1999
29.1.1999
12.3.1999
9.4.1999
4.5.1999
25.6.1999
30.7.1999
3.9.1999
5.10.1999
7.10.1999
27.10.1999
5.50
26.11.1999
5.25
Source: CNB
26
Discount rate (%)
Lombard rate (%)
10.5
14.0
Compulsory reserve (%)
11.5
9.5
50.0
13.0
39.00
29.00
25.00
22.00
20.00
18.50
23.0
18.20
17.90
17.00
16.50
16.20
16.00
15.70
15.40
15.20
14.90
14.70
14.50
14.80
18.50
18.00
17.50
16.75
15.50
15.00
14.75
19.0
15.00
14.50
7.5
14.00
13.50
12.50
11.50
10.50
9.50
8.75
11.5
16.0
10.0
15.0
7.5
12.5
5.0
8.00
7.50
7.20
6.90
6.50
6.25
6.00
5.75
6.0
10.0
5.5
8.0
5.0
7.5
2.0
1/
02
/1
1/ 996
30
/1
2/ 996
27
/1
3/ 996
26
/1
4/ 996
23
/1
5/ 996
21
/1
6/ 996
18
/1
7/ 996
16
/1
8/ 996
13
/1
9/ 996
10
10 /199
/0
8/ 6
11 199
/0
5 6
12 /199
/0
3 6
12 /199
/3
1/ 6
1
1/ 996
28
/1
2/ 997
25
/1
3/ 997
25
/1
99
7
%
4/
01
/1
99
7
4/
22
/1
99
7
5/
13
/1
99
7
6/
03
/1
99
7
6/
24
/1
99
7
7/
15
/1
99
7
8/
05
/1
99
7
8/
26
/1
99
7
9/
16
/1
99
7
10
/0
7/
19
97
10
/2
8/
19
97
11
/1
8/
19
97
12
/0
9/
19
97
12
/3
0/
19
97
Chart 1
Short term interest rates – pre-crisis period
13.0
12.0
40
%
15
PRIBOR1M
12.5
2WREPO
11.5
11.0
10.5
10.0
Chart 2
Short term interest rates – Turbulent period
55
50
45
PRIBOR1M
35
PRIBOR3M
30
25
20
10
2WREPO
27
1/
01
2/ /199
12 8
3/ /199
26 8
5/ /199
07 8
6/ /199
18 8
7/ /199
30 8
9/ /199
1
8
10 0/19
/2 98
12 2/19
/0 98
3
1/ /199
14 8
2/ /199
25 9
4/ /199
08 9
5/ /199
20 9
7/ /199
01 9
8/ /199
12 9
9/ /199
2
9
11 3/19
/0 99
12 4/19
/1 99
6
1/ /199
27 9
3/ /200
09 0
4/ /200
20 0
6/ /200
01 0
7/ /200
13 0
8/ /200
24 0
/2
00
0
%
28
11
16
12
/3
0
/1
9
/1
9
/1
9
/1
9
97
97
97
97
97
SWAP10Y
/0
9
/1
8
/2
8
/1
9
97
97
97
97
97
97
18
12
11
10
/0
7
/1
9
/1
9
/1
9
/1
9
/1
9
/1
9
97
97
97
20
10
16
26
05
15
24
03
/1
9
/1
9
/1
9
30
9/
8/
8/
7/
6/
6/
13
22
01
%
5/
4/
4/
Chart 3
Long term interest rates – Turbulent period
34
32
28
2WREPO
26
24
22
GB5Y
16
14
12
10
Chart 4
Short term interest rates – the DIT period
17
15
PRIBOR1M
14
13
12
2WREPO
10
9
8
7
6
5
1/
01
/1
2/ 998
19
/1
4/ 998
09
/1
5/ 998
28
/1
7/ 998
16
/1
9/ 998
03
/
10 199
8
/2
2/
1
12 99
8
/1
0/
19
9
1/
28 8
/1
3/ 999
18
/1
5/ 999
06
/1
6/ 999
24
/1
8/ 999
12
/1
9/ 999
30
/
11 199
9
/1
8/
19
9
1/
06 9
/2
2/ 000
24
/2
4/ 000
13
/2
6/ 000
01
/2
7/ 000
20
/2
00
0
Chart 5
Long term interest rate – the DIT period
15
14
13
%
9
6
2wREPO
12
11
10
S10Y
8
7
GB5Y
5
29