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Foreign Exchange Intervention and the Australian Dollar: Has it Mattered?

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Author Info
Hali J. Edison
Paul Cashin
Hong Liang

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Abstract

Since the Australian dollar was floated in December 1983, the Australian central bank (Reserve Bank of Australia) has actively intervened in the foreign exchange market. Using daily exchange rate and official intervention data from January 1984 to December 2001, this paper examines what effects, if any, foreign exchange operations by the Reserve Bank of Australia (RBA) have had on the level and volatility of the Australian dollar exchange rate. First, using an event study we evaluate the effectiveness of intervention by examining its direct effect on the level of the exchange rate. We find that over the period 1997-2001, the RBA has had some success in its intervention operations, by moderating the depreciating tendency of the Australian dollar. Second, we investigate the effects of RBA intervention policies on exchange rate volatility over the floating rate period. Our results indicate that intervention operations tend to be associated with an increase in exchange rate volatility, which suggests that official intervention may have added to market uncertainty. Overall, the effects of RBA intervention are quite modest on both the level and the volatility of the Australian dollar exchange rate.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/99.

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Length: 29 pages
Date of creation: 27 May 2003
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Handle: RePEc:imf:imfwpa:03/99

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Keywords: Foreign exchange Australia Intervention Australian dollar Exchange rate stability

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kim, Suk-Joong & Sheen, Jeffrey, 2002. "The determinants of foreign exchange intervention by central banks: evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 619-649, October. [Downloadable!] (restricted)
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  2. Rasmus Fatum, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 10, European Central Bank. [Downloadable!]
  3. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February. [Downloadable!] (restricted)
  4. Jonathan Kearns & Roberto Rigobon, 2002. "Identifying the Efficacy of Central Bank Interventions: The Australian Case," NBER Working Papers 9062, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Hong Liang & John T. Cuddington, . "Will the Emergence of the Euro Affect World Commodity Prices?," IMF Working Papers 00/208, International Monetary Fund.
  6. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October. [Downloadable!] (restricted)
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  7. Y.Chen & K. Rogoff, 2003. "Commodity Currencies and Empirical Exchange Rate Puzzles," DNB Staff Reports (discontinued) 76, Netherlands Central Bank. [Downloadable!]
  8. Diebold, Francis X & Nerlove, Marc, 1989. "The Dynamics of Exchange Rate Volatility: A Multivariate Latent Factor Arch Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar.. [Downloadable!] (restricted)
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  9. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," The Regional Economist, Federal Reserve Bank of St. Louis, issue May, pages 1-10. [Downloadable!]
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  10. Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 853-878, December. [Downloadable!] (restricted)
  11. Baillie, Richard T. & P. Osterberg, William, 1997. "Central bank intervention and risk in the forward market," Journal of International Economics, Elsevier, vol. 43(3-4), pages 483-497, November. [Downloadable!] (restricted)
  12. Kenneth Rogoff & Yu-chin Chen, 2002. "Commodity Currencies and Empirical Exchange Rate Puzzles," IMF Working Papers 02/27, International Monetary Fund.
  13. Robert Andrew & John Broadbent, 1994. "Reserve Bank Operations in the Foreign Exchange Market: Effectiveness and Profitability," RBA Research Discussion Papers rdp9406, Reserve Bank of Australia. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Juan Manuel Julio & Norberto Rodríguez & Héctor Manuel Zárate, 2005. "Estimating the COP Exchange Rate Volatility Smile and the Market Effect of Central Bank Interventions: A CHARN Approach," BORRADORES DE ECONOMIA 002605, BANCO DE LA REPÚBLICA. [Downloadable!]
  2. Balazs Egert & Lubos Komarek, 2005. "Foreign Exchange Interventions and Interest Rate Policy in the Czech Republic: Hand in Glove?," Working Papers 2005/07, Czech National Bank, Research Department. [Downloadable!]
    Other versions:
  3. Balázs Égert & Maroje Lang, 2005. "Foreign Exchange Interventions in Croatia and Turkey: Should We Give a Damn?," William Davidson Institute Working Papers Series wp755, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. Owen F. Humpage, 2003. "Government intervention in the foreign exchange market," Working Paper 0315, Federal Reserve Bank of Cleveland. [Downloadable!]
  5. Balázs Égert, 2006. "Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies," Working Papers 134, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
    Other versions:
  6. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 685-718. [Downloadable!]
    Other versions:
  7. Christopher J. Neely, 2006. "Identifying the effects of U.S. intervention on the levels of exchange rates," Working Papers 2005-031, Federal Reserve Bank of St. Louis. [Downloadable!]
  8. Chris Becker & Michael Sinclair, 2004. "Profitability of Reserve Bank Foreign Exchange Operations: Twenty Years After The Float," RBA Research Discussion Papers rdp2004-06, Reserve Bank of Australia. [Downloadable!]
  9. Dimitrios A. Sideris, 2007. "Foreign Exchange Intervention and Equilibrium Real Exchange Rates," Working Papers 56, Bank of Greece. [Downloadable!]
  10. Rasmus Fatum, 2005. "Daily Effects of Foreign Exchange Intervention: Evidence from Official Bank of Canada Data," EPRU Working Paper Series 05-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  11. José Darío Uribe & Jorge Toro, 2005. "Foreign exchange market intervention in Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 139-49 Bank for International Settlements. [Downloadable!]
  12. Herman kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 08/88, International Monetary Fund. [Downloadable!]
  13. Roberto Pereira Guimarães & Cem Karacadag, 2004. "The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey," IMF Working Papers 04/123, International Monetary Fund. [Downloadable!]
  14. Roberto Guimaraes & Cem Karacadag, 2005. "The Empirics of Foreign Exchange Intervention in Emerging Market Countries The Cases of Mexico and Turkey," Money Macro and Finance (MMF) Research Group Conference 2005 68, Money Macro and Finance Research Group. [Downloadable!]
  15. Balázs Égert, 2006. "Central Bank Interventions, Communication & Interest Rate Policy in Emerging European Economies," William Davidson Institute Working Papers Series wp846, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  16. Chowdhury, Khorshed, 2007. "Are The Real Exchange Rate Indices of Australia Non-Stationary in the Presence of Structural Break?," Economics Working Papers wp07-05, School of Economics, University of Wollongong, NSW, Australia. [Downloadable!]
  17. Christopher J. Neely, 2007. "Central bank authorities’ beliefs about foreign exchange intervention," Working Papers 2006-045, Federal Reserve Bank of St. Louis. [Downloadable!]
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