RDP 8812: International Interest Rate Linkages and Monetary Policy: The Case of Australia 5. Conclusions

The evidence in this paper suggests that Australian long-term interest rates have not become more volatile in recent years, nor have they become more closely aligned with foreign long-term rates. Australian short-term rates still have as much influence on the long end of the term structure as they did in the past.

The paper has argued that this result is to be expected, given that in the middle of the period under consideration, the exchange rate went from essentially being fixed to freely-floating. It is also to be expected that Australia's interest rates have moved rather differently from those in other countries over recent years because of the shocks which have come through the balance of payments and which called for strong policy responses.

This is not to deny that financial conditions in the rest of the world are important – as a small economy with a large current account deficit, Australia is acutely aware of those linkages. Had there not been a necessity for strong policy responses over recent years, Australia's interest rates may well have shown up as closely related to foreign rates. Rather, the paper has suggested that the floating of the exchange rate has given domestic monetary policy a degree of flexibility of response that might have been expected.