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Week 4
Learning Objectives
Introduction
RBA Responsibilities
"It is the duty of the Reserve Bank Board, within the limits of its
powers, to ensure that the monetary and banking policy of the
Bank is directed to the greatest advantage of the people of
Australia and that the powers of the Bank ... are exercised in
such a manner as, in the opinion of the Reserve Bank Board,
will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of
Australia."
Source http://www.rba.gov.au/MonetaryPolicy/about_monetary_policy.html
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Macroeconomic Context of
Interest Rate Determination
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Economic indicators
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CPI
Unemployment
Retail sales
Home sales
New car sales
Surveys consumer or business sentiment,
business investment plans and expectations
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Implications of PET:
upward sloping yield curve always means the
market expects rising future rates
investing a single n-year bond will yield the
same return as n 1-year bonds
observed forward rates equal (unobservable)
expected future spot rates
the term structure embodies predictions of
future spot rates
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Implications of LPT:
the yield curve should slope upwards more
often than downwards
investing in consecutive short term bonds will
not provide same return as investing in a
single long term bond
implied forward rates are greater than
expected future spot rates
the term structure cannot tell us much
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Credit risk
Liquidity
Supply of securities
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Conclusion
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Week Five
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