Profitability of Reserve Bank Foreign Exchange Operations: Twenty Years After the Float
AbstractSince the float of the Australian dollar in December 1983, the Reserve Bank of Australia (RBA) has retained the discretion to intervene in the foreign exchange markets in order to avoid what it perceives to be large overshooting in the currency. In this paper we invoke the ‘profit test’ first advocated by Friedman to assess whether the RBA’s foreign exchange operations have had a stabilising influence on the exchange rate. We do this over the entire post-float period, as well as for each of the three distinct cycles in the exchange rate during that period. The premise underlying the profit test is that if the central bank has made a profit from intervention in its currency, it must have ‘bought low and sold high’, which would work towards stabilising the exchange rate. Since the float, the RBA has made a profit of A$5.2 billion on its intervention operations, with profits made in each of the three cycles. The paper concludes that the profitability of intervention suggests that the RBA’s operations have had a stabilising influence on the exchange rate.
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Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2004-06.
Date of creation: Sep 2004
Date of revision:
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-09-30 (All new papers)
- NEP-CBA-2004-09-30 (Central Banking)
- NEP-FIN-2004-09-30 (Finance)
- NEP-IFN-2004-09-30 (International Finance)
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