Predicting the RBA’s target rate decision

Leng, Ailin (2010). Predicting the RBA’s target rate decision Honours Thesis, School of Economics, The University of Queensland.

       
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Author Leng, Ailin
Thesis Title Predicting the RBA’s target rate decision
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2010-11-04
Thesis type Honours Thesis
Supervisor A/Prof. Valentin Zelenyuk
Total pages 86
Language eng
Subjects 14 Economics
Formatted abstract

This thesis studied the RBA’s target rate decisions from January 1993 to June 2013. Compared to continuous modelling approaches, using the discrete choice method successfully distinguished the unobserved continuous optimal rate from the observed discrete target rate. Both monthly and quarterly variables were utilized. Model performance, in particular during the global financial crisis (GFC), is significantly improved by the inclusion of the spread of 5 years government bond rate and the spread of 90 days bank bill rate. To account for structural change of policy behaviour and change in macroeconomics conditions, GFC dummy variables were developed to distinguish the period from October 2008 to June 2013. Their inclusion has further improved the model fit, both for predicting monetary decisions before and after the crisis periods. Dynamic relationships were introduced by defining pairs of indicator dummies. The final model yields 81.33% and 83.11% in-sample prediction success rates, with monthly data and quarterly data respectively. The out-of-sample forecasts get 22 among 30 decisions correct. Combination forecasting method used by previous RBA target rate research does not yield better prediction performance.

Keyword Target rate
the RBA
probit model
dynamic model
forecasting

 
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Created: Mon, 16 Dec 2013, 12:50:14 EST by Yu-lin Huang on behalf of School of Economics