Abstract
Has Australia's shift to an inflation-targeting monetary policy regime had a significant impact on investors' perception of the interest rate risks in the market' Using a GMM estimation approach, we analyse the impact of Australian monetary policy adjustments on the 180-day and 30-day bank bill term premium throughout the period of 1985 to 2005, and find that since 1990, unanticipated adjustments to monetary policy have had a significantly larger impact on the term premium. This coincides with Australia's adoption of an inflation-targeting monetary policy framework. Since its implementation, unanticipated adjustments to monetary policy have conveyed more information to financial markets regarding the interest rate risks in the economy. This new information is immediately assessed and accounted for in the term structure, consequently influencing the term premium in the direction of the unanticipated cash rate adjustment.
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