A Random Walk Around the $A: Expectations, Risk, Interest Rates and Consequences for External Imbalance

Jeremy Smith and David Gruen

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Given essentially perfect capital mobility, Australian interest rates and the expected exchange rate change should satisify international arbitrage conditions. We examine an arbitrage condition for a US investor, with a view to explaining the large short-term real interest differential between Australia and the US since late 1984. We have some evidence for a risk premium until late 1985. Since then, we explain the differential as a result of foreign exchange market inefficiency or as a consequence of the market having continually and rationally expected significant real devaluation of the $A. We provide evidence for both these explanations and draw implications for the current debate on Australia’s external imbalance.

Date: 1989-10
References: Add references at CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://www.rba.gov.au/publications/rdp/1989/8906.html

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp8906

Access Statistics for this paper

More papers in RBA Research Discussion Papers from Reserve Bank of Australia Contact information at EDIRC.
Bibliographic data for series maintained by Paula Drew ().