Profitability of Reserve Bank Foreign Exchange Operations: Twenty Years After the Float
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.
|Date of creation:||Sep 2004|
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- 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,
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- repec:syd:wpaper:9905 is not listed on IDEAS
- repec:syd:wpaper:99-05 is not listed on IDEAS
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- Jonathan Kearns & Roberto Rigobon, 2003. "Identifying the Efficacy of Central Bank Interventions: Evidence from Australia," RBA Research Discussion Papers rdp2003-04, Reserve Bank of Australia.
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