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Foreign Exchange Intervention and the Australian Dollar

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Author Info

  • Hong Liang
  • Paul Cashin
  • Hali J. Edison

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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Bibliographic Info

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

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Length: 30
Date of creation: 01 May 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/99

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Related research

Keywords: Exchange rate stability; exchange rate; foreign exchange; exchange rate volatility; foreign currency; foreign exchange market; dollar exchange rate; exchange rates; foreign exchange intervention; foreign assets; exchange rate movements; exchange rate data; exchange markets; international settlements; foreign exchange operations; foreign exchange markets; exchange operations; daily exchange rate; exchange market intervention; exchange rate changes; currency swaps; foreign exchange rate; equilibrium exchange rate; industrial country; daily exchange rates; spot exchange rate; foreign exchange purchases; exchange rate fluctuations; exchange rate intervention; flexible exchange rates; foreign exchange rates; exchange purchases;

References

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  1. Kenneth Rogoff & Yu-chin Chen, 2002. "Commodity Currencies and Empirical Exchange Rate Puzzles," IMF Working Papers 02/27, International Monetary Fund.
  2. 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, Elsevier, vol. 15(6), pages 853-878, December.
  3. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper," IMF Working Papers 02/223, International Monetary Fund.
  4. 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., John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar..
  5. Hong Liang & John T. Cuddington, 2000. "Will the Emergence of the Euro Affect World Commodity Prices?," IMF Working Papers 00/208, International Monetary Fund.
  6. Robert Andrew & John Broadbent, 1994. "Reserve Bank Operations in the Foreign Exchange Market: Effectiveness and Profitability," RBA Research Discussion Papers, Reserve Bank of Australia rdp9406, Reserve Bank of Australia.
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