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The Effectiveness Of Reserve Bank Of Australia Foreign Exchange Intervention

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  • Zoe McLaren
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    Abstract

    Despite the absence of substantial evidence to support the claim that sterilised foreign exchange intervention does systematically affect exchange rates, Central Banks continue to employ this practice. Recent overseas studies strongly support the notion that intervention is effective in the short-term. This paper evaluates the effectiveness of foreign exchange intervention performed by the Reserve Bank of Australia and studies which factors enhance intervention, using an event-study methodology, The period considered includes 1991 - 1998. Evidence is found of the RBA being able to cause reversals in the exchange rate trend and effect the direction of the exchange rate. A number of factors were found to consistently contribute to successful intervention episodes, Intervention effectiveness was enhanced when the actual exchange rate was closer to its fundamental value and the absence of on-going intervention appeared to aid exchange rate smoothing. Evidence is also found in support of the hypothesis that the mechanism involved is that of signalling,

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    Bibliographic Info

    Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 849.

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    Length: 42 pages
    Date of creation: 2002
    Date of revision:
    Handle: RePEc:mlb:wpaper:849

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    Keywords: Foreign exchange intervention; Central banks; Exchange rate smoothing; Exchange rate volatility;

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    References

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    1. Kim, Suk-Joong & Kortian, Tro & Sheen, Jeffrey, 2000. "Central bank intervention and exchange rate volatility -- Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 381-405, December.
    2. Kathryn M. Dominguez, 1989. "Market Responses To Coordinated Central Bank Intervention," NBER Working Papers 3192, National Bureau of Economic Research, Inc.
    3. Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    4. Fatum, Rasmus, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 0010, European Central Bank.
    5. 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.
    6. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    7. Anna J. Schwartz, 2000. "The Rise and Fall of Foreign Exchange Market Intervention," NBER Working Papers 7751, National Bureau of Economic Research, Inc.
    8. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
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    Cited by:
    1. Ozge Akinci & Olcay Yucel Culha & Umit Ozlale & Gulbin Sahinbeyo─člu, 2006. "The effectiveness of foreign exchange interventions under a floating exchange rate regime for the Turkish economy: a post-crisis period analysis," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1371-1388.
    2. Ozge Akinci & Olcay Yucel Culha & Umit Ozlale & Gulbin Sahinbeyoglu, 2005. "The Effectiveness of Foreign Exchange Interventions for the Turkish Economy : A Post-Crisis Period Analysis," Working Papers 0506, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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