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Reserve Bank Operations in the Foreign Exchange Market: Effectiveness and Profitability

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Author Info
Robert Andrew (Reserve Bank of Australia)
John Broadbent (Reserve Bank of Australia)
Abstract

Since the float of the Australian dollar in December 1983, the Reserve Bank has intervened in the foreign exchange market in order to exert a stabilising influence. Whether this intervention has been stabilising cannot be directly observed since the behaviour of the exchange rate in its absence cannot be known. However, there are a number of ways of assessing it indirectly. The best known is the Friedman "profits test". Friedman (1953) argued that a central bank which was stabilising the exchange rate would tend to buy foreign exchange when its price was low, and sell when its price is high, and hence its operations would be profitable. This paper applies the profits test to the Bank's foreign exchange operations since the exchange rate was floated. The main conclusion is that over this period the Bank's foreign exchange operations have produced total profits of around $A3.4 billion, suggesting that intervention has tended to be stabilising. Other statistical tests developed by Wonnacott (1982) and Mayer and Taguchi (1983), also presented in this paper, support this conclusion.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9406.

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Date of creation: Nov 1994
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Handle: RePEc:rba:rbardp:rdp9406

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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. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  2. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, . "The Survival of Noise Traders in Financial Markets," J. Bradford De Long's Working Papers _123, University of California at Berkeley, Economics Department. [Downloadable!]
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  3. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring. [Downloadable!] (restricted)
  4. Taylor, Dean, 1982. "Official Intervention in the Foreign Exchange Market, or, Bet against the Central Bank," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 356-68, April. [Downloadable!] (restricted)
  5. Spencer, Peter D, 1985. "Official Intervention in the Foreign Exchange Market," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 1019-24, October. [Downloadable!] (restricted)
  6. Maurice Obstfeld, 1991. "The Effectiveness of Foreign-Exchange Intervention: Recent Experience," NBER Working Papers 2796, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Froot, Kenneth A & Frankel, Jeffrey A, 1989. "Forward Discount Bias: Is It an Exchange Risk Premium?," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 139-61, February. [Downloadable!] (restricted)
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  8. Corrado, Charles J. & Taylor, Dean, 1986. "The cost of a central bank leaning against a random walk," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 303-314, September. [Downloadable!] (restricted)
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(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. 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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  2. 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)
  3. Zoe McLaren, 2002. "The Effectiveness Of Reserve Bank Of Australia Foreign Exchange Intervention," Department of Economics - Working Papers Series 849, The University of Melbourne. [Downloadable!]
  4. Christopher J. Neely, 2005. "The case for foreign exchange intervention: the government as an active reserve manager," Working Papers 2004-031, Federal Reserve Bank of St. Louis. [Downloadable!]
  5. Shakila Aruman, 2003. "The Effectiveness of Foreign Exchange Intervention in Australia: A Factor Model Approach with GARCH Specifications," School of Economics and Finance Discussion Papers and Working Papers Series 135, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  6. Simwaka, Kisu, 2006. "The effectiveness of official intervention in foreign exchange market in Malawi," MPRA Paper 1123, University Library of Munich, Germany. [Downloadable!]
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