Guay Lim

Bank Interest Rate Adjustments: Are They Asymmetric?

This paper is concerned with the asymmetric adjustments between three Australian bank interest rates: a bank bill rate, a loan rate and a deposit rate. A multivariate asymmetric error-correction model is applied to capture the interplay of long-run relationships between the levels of the rates and short-run relationships between the changes in the rates. The empirical analysis, for the sample period 1990:01-2000:04, shows that interest rate adjustments, in response to positive and negative shocks, are asymmetric in the short run, but not in the long run. In particular, the results suggest that banks adjust their loan and deposit rates, in response to a change in the bank-bill rate, at a faster rate during periods of monetary easings (negative changes) than during periods of monetary tightenings (positive changes). Copyright 2001 by The Economic Society of Australia.

Deviations from uncovered interest parity in Malaysia

This paper applies the Switching ARCH (SWARCH) model of Hamilton and Susmel (1994) to investigate the dynamics of deviations from Uncovered Interest Parity (UIP) for Malaysia for the sample period 1978–2002. In particular, the deviations (or the risk premium) are modelled as a time series subject to discrete regime shifts between two possible states, “high volatility” and “low volatility”. We find that the SWARCH model provides a better description of the data and implies a much lower degree of volatility persistence than conventional ARCH models. Overall, the SWARCH model provides a clearer picture of how the UIP deviations have evolved over time and how the changes in the volatility of the deviations have coincided with major changes in financial liberalisation in Malaysia. This adds credibility to the hypothesis that the shifts are not statistical artefacts but indeed reflect real economic changes.

The distribution of exchange rate returns and the pricing of currency options

An empirical model of the distribution of exchange rate returns based on a combination of the generalized Student t distribution and conditional variance specifications, is formulated and estimated for four daily bilateral exchange rates over the period 1984 to 1991. The empirical results show that the stylized characteristics of exchange rate returns such as volatility clustering, leptokurtosis and skewness, are consistently captured by this model, in contrast with other model specifications based on more restrictive distributional assumptions. Implications of the analysis are also investigated for the pricing of currency options, including comparisons with Black–Scholes prices.

The effect of the Nikkei and the S&P on the All-Ordinaries: A comparison of three models

This paper examines the influence of shocks in the Japanese Nikkei Index and in the US S&P Index on the Australian All-Ordinaries Index. We present results from the application of three models--an autoregressive linear model, a GARCH-M model and a non-linear neural network model. According to standard forecast statistics, a restricted feedforward neural network model, incorporating parallel processing of information specified by time-zones, out-performs the linear and GARCH-M models. However, according to the Diebold-Mariano test of forecast accuracy, the mean loss differential between the neural network and the linear model is not statistically different from zero, while that between the neural network and the GARCH-M is statistically different from zero. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.

Introduction to “Exchange Rates in Europe and Australasia: Fundamental Determinants, Adjustments and Policy Implications”

The papers in this issue are concerned with the behaviour of exchange rates - their fundamental determinants, adjustment processes and policy implications. The authors combine theory with empirical evidence, test hypotheses as well as show the relevance of their analysis for policy. This Introduction addresses several questions. What are the contributions of the articles to the economics of exchange rates? Are they significant in increasing our understanding of the current issues and in addressing questions of policy? How can one explain the movements in the European and the Asian currencies? What can we expect to happen to the euro with the enlargement of the euro area? Do the papers provide frameworks to guide empirical research? In this Introduction, we highlight aspects of each paper that addresses these issues. Copyright Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia 2002.

Regional Beveridge Curves: A Latent Variable Approach

Dixon R., Lim G. C. and Freebairn J. Regional Beveridge curves: a latent variable approach, Regional Studies. This paper applies an unobserved components model to a panel of Australian data to identify the direction and timing of the shifts in regional Beveridge curves. The approach identifies a common factor while allowing for region-specific effects. The common factor that drives the relationship between regional unemployment and vacancy rates is extracted and it is then related to various explanatory variables. The contribution of common shocks to fluctuations in regional unemployment ranges from 18% to 68%. The paper demonstrates the usefulness of a latent variable approach and, in relation to policy, the findings suggest the need for an explicit regional policy to tackle unemployment in Australia.

Bank and Official Interest Rates: How Do They Interact Over Time?

This paper implements a procedure to evaluate time-varying bank interest rate adjustments over a sample period which includes changes in industry structure, market and credit conditions and varying episodes of monetary policy. The model draws attention to the pivotal role of official rates and provides estimates of the equilibrium policy rate. The misalignment of actual official rates and their changing sensitivity to banking conditions is identified. Results are also provided for the variation in intermediation margins and pass-throughs as well as the interactions between lending and borrowing behaviour over the years, including behaviour before, during and after the global financial crisis. The case studies are the US and Australian banking systems.

Testing the rationality of expectations in the Australian foreign exchange market using survey data with missing observations

This paper is concerned with testing the rationality of exchange rate expectations in the Australian foreign exchange market when there are missing observations in the survey data on expectations due to National or other holidays. The survey data analysed contains weekly observations on 1-week and 4-week ahead forecasts of the

Income Inequality, Trade and Financial Openness

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Discrete Time Dynamic Economic Models: Theory and Empirical Applications

A and the Yen/