Oral Interventions in the Exchange Rate Market: Evidence from Australia

36 Pages Posted: 16 Apr 2019 Last revised: 13 Feb 2020

See all articles by Yin Germaschewski

Yin Germaschewski

University of New Hampshire

Jaroslav Horvath

University of New Hampshire

Jiansheng Zhong

Wolfe Research

Date Written: February 12, 2020

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

Suggested Citation

Germaschewski, Yin and Horvath, Jaroslav and Zhong, Jiansheng, Oral Interventions in the Exchange Rate Market: Evidence from Australia (February 12, 2020). Available at SSRN: https://ssrn.com/abstract=3356115 or http://dx.doi.org/10.2139/ssrn.3356115

Yin Germaschewski

University of New Hampshire ( email )

Durham, NH 03824
United States
6038623369 (Phone)
6038623369 (Fax)

Jaroslav Horvath (Contact Author)

University of New Hampshire ( email )

Department of Economics
10 Garrison Avenue
Durham, NH 03824
United States
6038620867 (Phone)

HOME PAGE: http://https://sites.google.com/site/jaroslavjayhorvath/

Jiansheng Zhong

Wolfe Research ( email )

420 Lexington Ave.
New York, NY 10170
United States

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