TREASURY NOTE AND BANK BILL RATES, THE RISK PREMIUM AND AUSTRALIAN MONETARY POLICY*

This paper examines a link in the Australian monetary transmission mechanism based on the risk structure of certain interest rates. Monthly data on the bank-accepted bill and Treasury note rates reveal a significant reduction in both the mean and variance of the risk premium linking the two rates towards the end of 1989. The two interest rates cointegrate in each of the periods January 1984 to September 1989 and October 1989 to December 1995, though less significantly so in the earlier period, and formal tests indicate that the risk premium was stationary for each of the sub-periods. Well defined error-correction mechanisms suggest that the burden of adjustment to shocks to the money market was shared by the two interest rates. A stationary risk premium, combined with evidence that the Treasury note rate Granger-caused the bank bill rate in both sub-periods, indicates that the Reserve Bank has been able to influence the bill rate by targeting the note rate.