Treasury Note and Bank Bill Rates, the Risk Premium and Australian Monetary Policy

Abstract

This paper examines a link in the Australian monetary transmission mechanism based on the risk structure of certain interest rates. The bank-accepted bill and Treasury note rates cointegrate, and formal tests indicate that the risk premium was stationary after, but nonstationary before, the end of 1990. Well-defined and stable error-correction mechanisms also exist since December 1990, whereas prior to that they were unstable. These changes probably indicate a reduction in uncertainty and instability associated with the conduct of monetary-policy. The evidence also indicates that, since December 1990, the Reserve Back has been able to influence the bill rate by targeting the note rate.