Oral Interventions in the Exchange Rate Market: Evidence from Australia

Abstract

We construct a novel Exchange Rate Stance Index (ERSI) to measure the magnitude of oral interventions that talk down the Australian dollar - a preference for a weaker domestic currency expressed by the Reserve Bank of Australia (RBA) through public speeches and monetary policy statements in order to achieve balanced economic growth. We then employ the ERSI in a structural vector autoregressive model to quantify the impact of the RBA's oral interventions on the Australian dollar and overall economic activity. The estimation shows that an unanticipated increase in the ERSI leads to a significant weakening of the Australian dollar and considerably stimulates output. We demonstrate that the transmission of ERSI's impact on output occurs largely through the exchange rate depreciation, and that the contribution of ERSI shocks to Australia's macroeconomic fluctuations is sizable and similar to the exchange rate shocks.

Keywords: Central bank communication, Exchange rate, Monetary policy, Small open economy

JEL Classification: E58, F31, F44