The Effectiveness of Exchange Rate Intervention in Post-Float Australia

This study analyses the effectiveness of exchange rate intervention in Australia during the post-float era (1983-1994). The rationale underpinning the switch to the floating regime and the mechanics and channels of sterilised intervention are critically reviewed in the Australian context. The proponents of the Sisyphus hypothesis contend that Reserve Bank of Australia (RBA) intervention in the foreign exchange market was futile and downright damaging to Australia’s macroeconomic performance. The opponents assert that RBA intervention during the post-float era was stabilising and effective. The aim of this study is to empirically test the validity of the Sisyphus hypothesis on RBA intervention. To this end an optimal control model was formulated and the intervention process was tested using unit root and multicointegration techniques. The cointegration tests revealed the presence of a long-run equilibrium relationship amongst the intervention variables. The test results refuted the Sisyphus hypothesis on the ineffectiveness of RBA intervention. Recent studies based on the Friedman profit and Wonnacott exchange rate variability criteria reinforce the conclusions of the study discrediting the Sisyphus hypothesis.