THE EFFECTIVENESS OF RESERVE BANK OF AUSTRALIA FOREIGN EXCHANGE INTERVENTION

Zoe McLaren

No 849, Department of Economics - Working Papers Series from The University of Melbourne

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,

Keywords: Foreign exchange intervention; Central banks; Exchange rate smoothing; Exchange rate volatility (search for similar items in EconPapers)
JEL-codes: E44 G14 G15 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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