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The Effectiveness Of Reserve Bank Of Australia Foreign Exchange Intervention

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  • Zoe McLaren

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,

Suggested Citation

  • Zoe McLaren, 2002. "The Effectiveness Of Reserve Bank Of Australia Foreign Exchange Intervention," Department of Economics - Working Papers Series 849, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:849
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    File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-02/849.pdf
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    References listed on IDEAS

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    1. Eijffinger, S.C.W. & Verhagen, W.H., 1997. "The Advantage of Hiding Both Hands : Foreign Exchange Intervention, Ambiguity and Private Information," Discussion Paper 1997-30, Tilburg University, Center for Economic Research.
    2. 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.
    3. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, April.
    4. 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.
    5. G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3.
    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. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December.
    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 1356-1369, December.
    9. Almeida, Alvaro & Goodhart, Charles & Payne, Richard, 1998. "The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 383-408, September.
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    Cited by:

    1. 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.
    2. 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.

    More about this item

    Keywords

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

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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