The effect of political and bureaucratic regime changes on Australia’s real interest rate

We attempt to find out if changes in political and bureaucratic regimes lead to significant mean shifts in the Australian short-term real interest rate, using quarterly data for the period 1970:3 to 2019:1. Utilising a sophisticated structural break test, three distinct structural breaks are found in Australia's real interest rate. The empirical results show that a model estimated to consider the shifts in the political regime explains more of the variation in the real interest rate compared to a model that incorporates shifts in the bureaucratic regime. Results from several non-nested model selection tests also confirm this finding.