This paper examines the key characteristics of foreign exchange intervention by the Reserve Bank of Australia in the period 1983-1997. The effectiveness of intervention has come into question in view of the rapidly growing volume of trade in the markets. In the literature, tests of actual effects of foreign exchange intervention are inconclusive and mixed, with many reporting significant positive correlation of intervention on the conditional volatility of exchange rate changes and destabilising effects on the conditional mean. The intervention on the $US/$A exchange rate market by the Reserve Bank of Australia in the post-floating period (since 1983- 97) can be broken into five distinct phases. This paper investigates the changing effectiveness of the RBA's daily intervention on the exchange rate by decomposing the exchange rate response to the intervention into various separate components and finds that the overall effects of intervention on the days of intervention seemed to be destabilizing. However, we argue that lower (or higher) values of the $A and higher conditional volatility on the days of intervention purchases (or sales) of the $A reflect the simultaneity issue; with sustained and large interventions, the foreign exchange market is stabilised to some extent in terms of direction and volatility. Without these interventions, the market would have moved further and exhibited more volatility.
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Paper provided by Sydney - Department of Economics in its series Papers with number
99-05.
Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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