Jeffrey Sheen

Central bank intervention and exchange rate volatility -- Australian evidence

Abstract This paper examines the key characteristics of foreign exchange intervention by the Reserve Bank of Australia in the period 1983–1997, which can be broken into five distinct phases. We investigate the changing effectiveness of daily intervention on the

International Linkages and Macroeconomic News Effects on Interest Rate Volatility - Australia and the US'

US/

An empirical analysis of the effect of monetary disequilibria in open economies

A exchange rate by decomposing the exchange rate response to the intervention into various separate components. We find contemporaneous positive correlation between the direction of intervention and the conditional mean and variance of exchange rate returns. We show that sustained and large interventions have a stabilising influence in the foreign exchange market in terms of direction and volatility. Without these interventions, the market would have moved further and exhibited more volatility.

Minute-by-minute dynamics of the Australian bond futures market in response to new macroeconomic information

We examine international linkages between daily time series of US and Australian 3 month Treasury Bills and 10 year Government Bonds from 1987-95, paying particular attention to the effects of macroeconomic announcements in both countries. The 2 countrys interest rate data are modelled by a bivariate EGARCH formulation. The results suggest that market participants believed the Reserve Bank of Australia targetted the CPI, while the Federal Reserve targetted economic activity. US macroeconomic activity announcements significantly moved Australian interest rates, particularly at the short end. Australian interest rates moved significantly in response to the previous days US interest rate shocks. The conditional volatilities of the Australian interest rate changes were also significantly influenced by lagged US interest rate shocks, as well as by surprises in US macroeconomic announcements. Some macroeconomic news announcements raised conditional volatilities, while others reduced them. Overall there was a remarkable and complex array of linkages between the 2 countries.

Asymmetric Monetary Policy in Australia

Abstract A dynamic disequilibrium simultaneous-equation econometric model for France and West Germany is set up, estimated and simulated to consider the ways in which disequilibrium in the money markets is eliminated. The results provide suggestive evidence to support the monetary approach to the balance of payments.

Cyclical Flows in Australian Labour Markets

Abstract This paper investigates the response efficiency of the 10 year Australian Commonwealth bond futures market to the news content of the Australian scheduled information release from January 1993 to July 1997. Using Money Market Services market expectations data to generate the news component of announcements, we find that the futures price falls in response to higher than expected current account deficit, inflation, GDP and retail sales announcements, whereas an unexpected rise in unemployment raised it. In addition to the price response, there is strong evidence of elevated volatility of the price and of trading volumes following all five news announcements. More importantly, most of the market adjustments (of price and volatility) to new information were completed during the first minute following each news announcement suggesting market efficiency of the Australian futures market. The trading volumes, on the other hand, continue to respond to news for 1 h following the news release. This suggests that, after the new equilibrium price has been quickly established and its volatility dispersed, volume trading persists for the purposes of portfolio re-balancing by liquidity traders and for establishing a complete consensus amongst traders.

Consumption Risk-Sharing Within Australia and With New Zealand

We find evidence for asymmetric behaviour in Australian monetary policy. During 1984-1990, the Reserve Bank of Australia acted with considerable discretion yielding poor performance of an interest rate rule. However it behaved asymmetrically to inflation and the output gap in downturns and upturns. On embracing inflation targeting from 1991, it enhanced its credibility by anchoring inflation expectations. Not only did its actions become more predictable in 1991-2002, it responded asymmetrically only to output, switching to act more acutely in downturns. While its asymmetric behaviour could result from asymmetric preferences or non-linear aggregate supply, our results support the former explanation.

An Estimated Small Open Economy Model with Labour Market Frictions

Using a four-state model, we show that Australian labour markets exhibited more mobility after 1980, but most gains occurred before 1993. We find large and significant procyclical effects in the transition probabilities from unemployment to jobs, which contribute significantly to the variations of unemployment. Transitions from jobs to unemployment are countercyclical, but the effects are small and in most cases insignificant. Although job-losing and job-finding both matter for the evolution of unemployment over the whole business cycle, job-finding has become more important in recent years. During recessions, job-finding is a bigger issue. Each transition probability explains only a small proportion of participation rates.

Modelling the floating Australian dollar: Can the random walk be encompassed by a model using a permanent decomposition of money and output?

We quantify how output risks are smoothed within Australia, and between Australia and New Zealand. About 90 per cent of shocks were smoothed within Australia through credit and capital markets, with fiscal policy a source of dis-smoothing after 1992. Risk-sharing between Australia and New Zealand was greater than within Europe, occurring mostly through credit markets. Fully integrated financial markets between Australia and New Zealand before 1983 would have yielded a welfare gain of 8.9 per cent of certainty-equivalent consumption for New Zealand, but a loss of 1.7 per cent for Australia. These gains (losses) were largely resolved by the deregulations and trade agreement of the early 1980s.

The Australia-Asia Business Cycle Evolution

We estimate small open economy models with involuntary unemployment using Australian data from 1993 to 2007, focusing on hiring costs and real wage rigidity. We find a strong preference for models with hiring costs, which account for 0.97% of GDP. The data favour models with real over nominal wage rigidity. Impulse responses to technology shocks reveal no productivity-employment puzzle for the preferred model. In the short run, technology shocks, operating through hiring costs via labour demand, explain most unemployment variance, while labour preference shocks explain most real wage variance. Demand shocks dominate supply shocks in explaining output variance. In the long run, these contributions reverse. Out-of-sample conditional forecasts perform well but cannot predict the confidence effects of the crisis.