Why Rates Matter

Me in Crikey yesterday HERE

And below:

Yesterdays post “Rates of Gloom” was actually a more in-depth spin-off of this post, so for those of you struggling to follow the stats, this should make everything a lot clearer.

In Rates of Gloom we just modelled the relationship we see below, but also accounted for the effect of leadership changes (the leadership dummy variables) and the honeymoon period that both leadership changes and interest rate rises enjoy (through the time trend variable). Just as the leadership changes of Latham and Rudd increased the ALP vote before it declined from that peak slowly over time as the honeymoon ended, so to with an interest rate rise. After a rate rise, the ALP vote moves up, but then slowly over time it pulls back slightly. There are more complicated ways to model that type of behaviour, but the time trend variable did the job adequately.

So if you read this post first and keep the above in your thought orbit, for those of you not big on the stats side of things it should make Rates of Gloom a bit easier to follow.

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With interest rates and widespread navel gazing about the political consequences taking up the media-space, today instead of picking the verbal lint from our bellybuttons over the issue, how about we go to some spiffy little charts that sum up perfectly the millions of words that will be written over the next month.

First up, let’s run the RBA cash rate against the PM dissatisfaction rating over the period 1999-2007, using Newspoll monthly averages for the latter:

Now how is that for a snazzy little leading indicator!

Next up we’ll run the cash rate against the Opposition primary vote over the same period using Newspoll monthly averages:

 

One word sums that up – Ouch.

Now for the relationship between the Opposition primary vote and the PM dissatisfaction rating:

And that sums up the debate – three graphs are worth a million words.

The only question becomes whether interest rate increases lift the Opposition primary vote directly, whether it increases the Opposition primary vote via PM Dissatisfaction or whether it works via both channels?

As far as the Coalition is concerned however, it’s probably a moot point.

UPDATE:

I was just informed of a pretty spiffy site:

“Soapbox is a unique Australian political archive of
federal elections, bringing together key historical documents and
audio-visual material, and making them available to students, researchers,
journalists and the general public.”

It’s a cracker of a site if you are into historical election material. Very, very, very much worth a visit:

http://soapbox.unimelb.edu.au/

Rates of Gloom

It’s equation time!

So how important is the cash rate on the Oppositions primary vote?

We’ve modelled this before over here in terms of the effect a rate change has on the primary votes of major parties and how long it takes for that effect to flow through, but today we’ll take a different approach entirely.

What we’ll do today is make a simple model that can explain the effect (if any) the cash rate level has on the ALP primary vote by taking into account the ALP leadership and any linear time trends that may be floating around in the mix.

So to start with we’ll be using the period from 1999 through to the present, and the basic model we’ll be looking at is:

Where:

ALP = the ALP primary vote at time t (where t is the month).
Cash Rate = the RBA cash rate at time t.
Time = a time variable that has a value of 1 in January 1999, 2 in February 1999 etc right through to its current value of 106 in October 2007.
DummyRudd = dummy variable which has a value of 1 for the periods of the Rudd leadership and zero for all other times.
DummyLatham = dummy variable which has a value of 1 for the periods of the Latham leadership and zero for all other times.

So what we are modelling here is how value of the cash rate explains the level of the Oppositions primary vote, but where we also account for the two leadership periods of Latham and Rudd having an effect, as well as allowing for a linear trend to manifest in the vote.

Once we run the regression model, our results come out as:

Which, for the non-geeks can be visualised as this:

[Note: I've ignored the autoregressive nature of the polling series so that the results can be better visualised for the non math-geeks here]

The “Fitted Primary Vote” in the graph is our modelled vote based on the regression equation.

So what to make of it?

For every 1 point increase in the cash rate, the ALP primary vote increases by 3.5 points. So if rates were to rise by 0.25 in November, the ALP primary would be expected to rise by 0.9 points, or around 1 point.

It also suggests that the Rudd leadership (or what has happened during the period of the Rudd leadership) has boosted the ALP primary vote by around 8 points, and that Latham boosted the ALP primary vote by about 2.5 points (which is fair enough considering that Latham took over from the dire polling position Crean had created).

All up, our variables explain about 75% of the movement in the ALP primary vote over the period 1999 through to the present.

If we now run the equation again, but this time using the ALP two party preferred vote, remove the time trend variable and use the period from December 2002 through to today (simply because my TPP figures before that are in a database that I’ve stuffed up and need to rebuild ) we get:

This gives us a visualised model of:

 

Again, our variables here explain about 75% of the movement in the ALP two-party preferred vote, the cash rate has nearly identical influence on the TPP here as it did to the primary vote in the first equation, Latham again lifted the TPP vote about the same as he lifted the primary, but this time the Rudd leadership has increased the TPP vote only around 3.5%. This is expected as remember the ALP TPP had been growing constantly since the last election, it was their primary vote that got the big boost under Rudd.

So all up, if rates rise by 0.25 points, the ALP can expect their primary vote to increase by about a point, and their two party preferred vote to do likewise.