RDP 9111: Monthly Movements in the Australian Dollar and Real Short-Term Interest Differentials: An Application of the Kalman Filter Appendix 1: Data Methods and Sources

All data is sampled as at the last trading day of each month. This study covers the post-float period in Australia, extending from December 1983 to September 1990, inclusive.

All data is quoted according to the United States convention. All bilateral exchange rates (4 p.m., Sydney) are obtained from the International Department of the Reserve Bank of Australia, and are quoted directly, such that the value of one unit of foreign currency is expressed in terms of Australian dollars.

An index of trade-weighted exchange rates is also constructed. 1990 trade weights for all of Australia's trading partners are apportioned to one of three categories bearing the name of the largest component country (United States 42.65%, Japan 35.63% and West Germany 21.74%).

The three-month Eurocurrency rates for the United States, Japan, West Germany and the United Kingdom are obtained from the International Department of the Reserve Bank of Australia. The USD, JPY, and DEM rates are London rates. The first of these refers to the close while the latter two refer to midrates. The GBP rate is a Paris midrate. The 90-day bank bill rate is chosen as the representative short-term rate for Australia, and is obtained from the Domestic Markets Department of the Reserve Bank of Australia. A trade-weighted interest rate is constructed using the weights described above for the trade-weighted exchange rate index.

With the exception of Australia, consumer price indices are provided by the Overseas Economies Section of the Economic Analysis Department of the Reserve Bank of Australia. Quarterly Australian data, obtained from the ABS, are Medicare adjusted. Simple linear interpolation^[44] provides monthly statistics.

Real exchange rates are constructed as:

where s_t is the nominal exchange rate and p_f,t/p_d,t is the ratio of foreign to domestic CPIs.

Ex post real interest differentials are constructed by subtracting the actual inflation differential (as measured by one-period logarithmic differences in the ratio of foreign to domestic CPIs) at time t, from the nominal one-month interest differential at time t−1.

All results are reported in units of per cent per month at an annualized rate.

Footnote

Linear rather than geometric interpolation is used since the rate of change of Australian CPI data is very small. We note that calculating monthly CPI data in this manner gives investors the benefit of information they do not yet possess. [44]