Profitability of Reserve Bank Foreign Exchange Operations: Twenty Years After the Float

Chris Becker and Michael Sinclair
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Chris Becker: Reserve Bank of Australia
Michael Sinclair: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: 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.

Keywords: intervention; profit test; foreign exchange rate; overshooting (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-cba, nep-fin and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2004-06

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