Sterilised Interventions within a Heterogeneous Expectation Exchange Rate Model: Evidence from the Reserve Bank of Australia

Abstract

In this article, we study the effectiveness of central bank intervention within a heterogeneous expectation exchange rate model for the Reserve Bank of Australia. The empirical evidence is gathered by applying a Markov-switching approach to daily A$/US$ exchange data from December 1983 to April 2008. Our results support both chartist and fundamentalist regimes. It is shown that the two regimes are persistent and that the fundamentalist regime is riskier. Moreover, interventions when the chartist regime prevails increase the proportion of fundamentalists and thus exert a stabilising effect on the foreign exchange market. ©2011 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.