Oral interventions in the foreign exchange market: evidence from Australia

Yin Germaschewski, Jaroslav Horvath () and Jiansheng Zhong ()
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Jaroslav Horvath: University of New Hampshire
Jiansheng Zhong: Capula Investment Management LLP

Empirical Economics, 2022, vol. 62, issue 6, No 4, 2713-2737

Abstract: Abstract In response to the large fluctuations of the Australian dollar in the beginning of the twenty-first century, the Reserve Bank of Australia (RBA) started to express a preference for a weaker domestic currency through public speeches and monetary policy statements in order to achieve balanced economic growth. We construct a novel Exchange Rate Stance Index (ERSI) to measure the magnitude of RBA’s oral interventions in the foreign exchange market. We employ the ERSI in a structural vector autoregressive model to quantify the impact of RBA’s communication on the Australian dollar and overall economic activity. An unanticipated increase in the ERSI leads to a significant weakening of the Australian dollar and considerably stimulates output. The ERSI shocks account for a sizeable fraction of Australia’s macroeconomic fluctuations, comparable to the exchange rate shocks. The impact of ERSI on output is largely transmitted through the exchange rate depreciation.

Keywords: Central bank communication; Exchange rate; Monetary policy; Small open economy (search for similar items in EconPapers)
JEL-codes: E58 F31 F44 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00181-021-02112-5

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