A former member of the RBA board has called on the Reserve Bank to intervene to lower the value of the Australian dollar. Professor Warwick McKibbin, from the ANU, argues the inappropriate appreciation of the local currency stems from foreign central banks buying the dollar as a 'safe haven' asset.
If foreigners want to hold more Australian dollars in order to park these dollars in foreign exchange reserves and will not be using these dollars to buy Australian goods and services, then the best response is for the Reserve Bank to print more Australian dollars. These additional dollars should be sold to foreign central banks in return for foreign assets. The foreign assets would appear on the RBA balance sheet exactly balancing the increase in money supply. There would be no effect on the domestic economy from this global shock if the RBA undertook this transaction.
This policy could be carried out either by direct transactions with foreign central banks or it could be done in the foreign exchange market by the Reserve Bank buying foreign currency equal to the amount they know foreign central banks are buying of Australian dollars. It is the case that the Australian money supply would increase but this would be by the amount of purchases by foreigners and thus domestic liquidity would be unchanged and domestic monetary policy and economic activity would?be unaffected.
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