Operating procedures and the expectations theory of the term structure of interest rates: the New Zealand experience from 1989 to 2008

The operating procedure of a central bank influences in no small measure whether the behaviour of interest rates is consistent with the Expectations Hypothesis (EH). In New Zealand, the predictive content of the term spread improves markedly in the wake of the switch from a quantity-based to a price-based operating procedure in March 1999. The Official Cash Rate (OCR) system has made it easier for market participants to understand the day-to-day conduct of monetary policy. As a result, market interest rates have become more predictable, thereby contributing to the success of the EH in explaining the behaviour of yields on short-dated financial instruments.