Abstract
This paper investigates the effects of the Australian current account news on exchange rates and interest rates for the period July 1985 to December 1992. The results indicate that the Australian dollar depreciated and interest rates rose as a result of an announcement of a larger than expected current account deficit. This is consistent with the view that market participants expected a foreign exchange market intervention sale of the Australian dollar by the Reserve Bank of Australia and they used the portfolio balance model of exchange rate determination when responding to the news. In addition, significant structural breaks were found and the analysis shows that after January 1990 the news affected neither exchange rates nor interest rates.
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