Monetary Policy, Open Market Operations and New Zealand Interest-Rate and Exchange-Rate Markets

Abstract

This paper examines the impact of the Reserve Bank of New Zealand's open market operations (OMOs) and monetary policy on interest rates and foreign exchange markets. We focus on the effect of OMOs and cash rate target announcements in two distinctive monetary policy regimes with different degrees of policy transparency. Our empirical results suggest that the OMOs conducted by the central bank have significant contemporaneous impacts on returns volatility of short-and long-term interest rate markets but not on the New Zealand dollar exchange rate market. Strong OMO effects are observed for all five markets during the MCI period. Our findings suggest that, although the role of the OMOs decreases as monetary policy transparency increases, the OMOs still convey important information that shapes market expectations and redirects market participants' expectations of future monetary policy movements. OMOs therefore impact on mean returns and return volatility of New Zealand financial markets.

Key Words:

• Monetary policy
• open market operations
• asset return volatility
• EGARCH.

JEL CLASSIFICATIONS:

• C32
• E52
• G12
• G14