This study explores the inter relationships between the nominal interest rates of Australia and its principal trading partners. The analysis focus on the short end of the yield curve --specifically, rates of up to one year to maturity. In essence, the study comprises a suite of essays, which together provide an overall understanding of the relevant relationship that is, in both depth and scope, greater than the sum of the individual essays. The inquiry begins with an investigation of the impact of the overnight information content of international interest rates upon the Australian domestic money market. The results indicate that the strongest information impact on Australian interest rates is from the overnight interest and exchange rates of the United States. This is followed, in the second essay, by an investigation of the relationship between domestically and internationally traded Australian dollar denominated, financial assets. The results indicate that a Euro-Australian dollar inter-bank deposit and Australian bank accepted bills are effectively the same assets. Based on this result the third essay investigates the extent to which the short-term nominal interest rates of Australia, the United Kingdom, the United States and Japan are consistent with the expectations theory of the interest rate term structure. The results indicate that nominal inter-bank deposit rates in all four currencies are broadly consistent with the expectations theory. In addition, two common stochastic trends are identified, which can be associated with the markets of the United States and Japan. The forth essay focuses on the bilateral relationships between the nominal interest rates of Australia, the United States, the United Kingdom and Japan, and aims at establishing the extent to which the observed data is consistent with interest rate parity conditions. It was found that, in the long run, and with some exceptions, there is strong support for all three of the usual parity conditions. These relationships are interpreted as a measure of the efficiency with which the interest rates are simultaneously determined across the four markets. The final essay brings together insights gained in the preceeding essays to help analysis the interactions between each of the four markets at each of the four maturities selected within the consistent framework of a single model. The results indicate that the system can be usefully conceptualised as interactions between two sub-systems. The first sub-system models the nexus between Australia and the United States, and the second sub-system, that between the United Kingdom and Japan. The interactions within and between these two sub-systems are found to change as the maturity increases. At the shortest maturity, Australian interest rates are directly affected by both sub-systems. In contrast, at the longest maturity, Australian interest rates anticipate those of the United States and are not directly affected by the second sub-system.

This dissertation treats two different themes. The first, addressed in Chapter 1, regards the pricing of interest rate swaps. The second, studied in the remaining two chapters, regards the implications of monetary policy for the term structure of interest rates.The pricing of interest rate swaps An interest rate swap is an agreement between two parties to exchange fix for floating interest rate payments for a certain period of time. Floating rate payments are made at a floating-rate index, e.g. the three-month interbank rate, while the fixed rate payment, the swap rate, is determined on the market. The swap rate may include a compensation for credit risk depending on the counterparty's credit quality, but in the standard agreement there is no exchange of principal, only interest is transacted, and this effectively reduces concerns about credit risk. The swap spread for a given maturity is the difference between the swap rate and the risk-free rate, measured as the yield on a government bond with similar cash flows. If the standard swap agreement entails negligible credit risk one might expect swap spreads to be low and stable, but market swap spreads vary over time. There are periods when swap spreads are low in accordance with the general theory, but there are also periods when swap spreads reach levels that seem high.The first chapter of this dissertation examines a setting where a positive swap spread arises as part of an equilibrium in a perfectly competitive capital market. The model is one of insurance under adverse selection. A firm that seeks debt financing can insure itself against interest rate risk either by borrowing long-term or by borrowing short-term and entering a pay fix - receive float interest rate swap. The latter alternative allows for a partial hedge as the firm can choose to swap only a fraction of the nominal amount. In this setting, if firms' credit quality and interest rate risk tolerance are correlated creditors can use the pricing of interest rate swaps as a screening device. A low-risk firm, being a firm with favorable private information, selects short-term borrowing and partial insurance. A high-risk firm, being a firm with less favorable prospects, is by assumption also less risk tolerant. It therefore has a higher demand for insurance and the equilibrium swap spread is set such that the high-risk firm finds it more beneficial to borrow long-term at a cost that exceeds the expected cost from short-term financing, but that provides a full insurance to interest rate risk. Monetary policy and the term structure of interest rates Taken separately monetary policy and term structure modeling are two well-established research areas each comprising a substantial amount of research. But relatively few attempts have been made to integrate the two. The last two chapters of this dissertation take the view that the conduct of monetary policy is an essential element in the determination of the term structure of interest rates, and that explicitly considering the role of amonetary authority in the analysis has a potential of enhancing our understanding of term structure dynamics, and its relation to macro-economic fundamentals in particular. This approach to the term structure is supported by the fact that the analytical framework developed in the literature on optimal monetary policy translates conveniently into a setting well suited for term structure analysis. Chapter 2 makes the point in the simplest setting. A standard model of optimal monetary policy is reformulated in continuous time. Combined with a parameterized form for the market price of risk this produces a standard term structure model with well-known characteristics. This model is estimated on US data for the period 1987 - 2002, treating state variables as latent factors of the term structure. The parameters that are estimated comprise parameters describing the monetary transmission mechanism, parameters describing the monetary authority's preferences and parameters describing the market price of risk. Our estimation technique differs from comparable estimations in the monetary policy literature as these typically take state variables to be directly observable measures of macro-economic aggregates. The results using term structure data are both similar and different to previous findings. The main difference when using term structure data is that the central bank's estimated policy is more aggressive, i.e. more responsive to changes in the underlying state variables.Chapter 3 is devoted to the zero bound on nominal interest rates. While the zero bound is well recognized in the literature on term structure modeling, not much has been said about term structure dynamics under the special circumstance that the short rate is close to zero. I find the optimal monetary policy approach to be particularly well suited for this analysis. The chapter studies a continuous time reduced form version of the monetary transmission mechanism. The monetary authority's optimization problem is formed according to two specifications, interest rate stabilization and interest rate smoothing. For the former the optimization problem is solved analytically, while numerical procedures are adopted forthe latter. The chapter then turns to study implications for the term structure under risk-neutrality. Term structure equations are solved numerically and implications for the term structure are discussed. Data for a low-interest rate country like Japan for 1996 - 2003 exhibits s-shaped yield curves and yield volatility curves. This shape is found to be consistent with a smoothing objective for the short rate. / <p>Diss. Stockholm : Handelshögskolan, 2004</p>

[pt] Quais devem ser a características da política monetária ótima sob comprometimento em uma situação de armadilha da liquidez global quando os Bancos Centrais não coordenam suas ações? Fazendo o uso de um modelo de economia aberta com dois países, fizemos um exercício numérico para endereçar essa questão e estudar as diferenças entre este caso e uma situação cooperativa, na qual as autoridades monetárias não estão somente preocupadas com a utilidade da população nacional, mas em vez disso maximizam uma medida de bem-estar global. Nossas descobertas apontam para diferenças nas características de dependência histórica e internacional da prescrição monetária em cada um dos casos observados. Também é feita uma análise de bem-estar do nosso experimento que sugere que um Banco Central local prefere, não só permanecer restrito pelo limite inferior zero da taxa de juros nominal por um período maior, mas também que o país estrangeiro saia dessa situação o quanto antes. Por fim, fazemos uma análise de robustez dos nossos resultados variando o tamanho de cada nação e o grau de substituição dos produtos produzidos em cada localidade. / [en] What should be the characteristics of the optimal monetary policy under commitment in the situation of a global liquidity trap when Central Banks do not coordinate their actions? Using a two-country open economy model, we perform a numerical exercise in order to address this question and study the differences between this setting and a cooperative situation, when monetary authorities are not only worried with the national household utility, but instead maximize a measure of world welfare. Our findings points towards differences of history and international dependence features of optimal monetary prescriptions in each of the observed cases. We also execute a welfare analysis of our experiment that suggests that a local Central Bank prefers, not only to stay restrained by zero lower bound (ZLB) on nominal interest rates for a longer period, but also that the foreign country exists this situation as early as possible. Lastly, we make a robustness analysis of our results varying the size of each nation and the degree of substitution of the composite goods produced in each locality.

[pt] Tarifas comerciais podem ser usadas para auxiliar o Banco Central na estabilização da economia? Para responder essa pergunta construímos um modelo Novo Keynesiano de economia aberta com dois países onde as firmas têm poder de mercado suficientemente alto para definir preços diferentes para o mercado local e estrangeiro e obtemos a política monetária e tarifária ótima sob a existência de um limite inferior para a taxa nominal de juros. Fazendo um exercício numérico, analisamos duas situações: quando apenas um país se encontra em uma armadilha de liquidez e quando ambos os países se encontram presos em uma armadilha de liquidez global. Nossos resultados sugerem, que mesmo quando os dois países estão cooperando, a existência do limite inferior da taxa de juros nominal gera uma situação onde o uso ativo de tarifas comerciais pode aumentar o bem-estar da economia. / [en] Can trade tariffs be used to help the Central Bank stabilize the economic cycle? To answer that question we build a New Keynesian Open Economy model with two different countries and where firms have enough market power to set prices in both Home and Foreign markets and calculate the optimal monetary and tariff policy under the existence of a Zero Lower Bound on the nominal interest rate. We perform a numerical exercise to analyse two distinct situations: when only one country is restricted by the Zero Lower Bound and when both countries face this constraint. Our results suggest that the Zero Lower Bound creates a situation in which active use of trade tariffs can be optimal, even if countries are cooperating.