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Profitability of Reserve Bank Foreign Exchange Operations: Twenty Years After The Float

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Author Info
Chris Becker (Reserve Bank of Australia)
Michael Sinclair (Reserve Bank of Australia)
Abstract

Since 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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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2004-06.

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Date of creation: Sep 2004
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Handle: RePEc:rba:rbardp:rdp2004-06

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Related research
Keywords: intervention; profit test; foreign exchange rate; overshooting;

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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

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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. Lucio Sarno & Mark P. Taylor, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September. [Downloadable!] (restricted)
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  2. Michael McKenzie, 2004. "An Empirical Examination of the Relationship Between Central Bank Intervention and Exchange Rate Volatility: Some Australian Evidence," Australian Economic Papers, Blackwell Publishing, vol. 43(1), pages 59-74, 03. [Downloadable!] (restricted)
  3. Hali J. Edison & Paul Cashin & Hong Liang, 2003. "Foreign Exchange Intervention and the Australian Dollar: Has it Mattered?," IMF Working Papers 03/99, International Monetary Fund. [Downloadable!]
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  4. Kim, S.J. & Kortian, T. & Sheen, J., 1999. "Central Bank Intervention and Exchange Rate Volatility- Australian Evidence," Papers 99-05, Sydney - Department of Economics.
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  5. Rogers, J. M. & Siklos, P. L., 2003. "Foreign exchange market intervention in two small open economies: the Canadian and Australian experience," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 393-416, June. [Downloadable!] (restricted)
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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. Buncic, Daniel & Melecky, Martin, 2007. "An estimated New Keynesian policy model for Australia," MPRA Paper 4138, University Library of Munich, Germany. [Downloadable!]
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  2. Jonathan Kearns & Philip Lowe, 2008. "Promoting Liquidity: Why and How?," RBA Research Discussion Papers rdp2008-06, Reserve Bank of Australia. [Downloadable!]
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