Central bank intervention and exchange rate volatility - Australian evidence

This paper examines the key characteristics of foreign exchange intervention by the Reserve Bank of Australia in the period 1983-1997, which can be broken into five distinct phases. We investigate the changing effectiveness of daily intervention on the $US/$A exchange rate by decomposing the exchange rate response to the intervention into various separate components. We find contemporaneous positive correlation between the direction of intervention and the conditional mean and variance of exchange rate returns. We show that sustained and large interventions have a stabilising influence in the foreign exchange market in terms of direction and volatility. Without these interventions, the market would have moved further and exhibited more volatility.