No abstract

Discussions on Reserve Adequacy Assessment on a country-specific basis have been scant in the literature despite its significance. This situation has led to calls for the discussions on reserves holdings and adequacy levels to be more rooted in the country's Article IV consultation report.In this study, we examined if reserves build-up by the central bank of Ghana meets the specific metrics of theoretical reserve models such as the reserves to M2 growth metrics and the Greenspan-Guidotti rule metrics. We also determined whether the reserves build-ups correctly adjust to economic and policy variables and whether these adjustments are consistent with the predictions of empirical theories and findings. We again examined whether exchange rate depreciations contribute to positive reserves accumulation by the central bank of Ghana.Using Vector Error Correction Model, this research has rejected the short-run matching of the reserves stock of the central bank of Ghana to the theoretical standard metrics of 20% of broad money and 100% of short-term debts. These results have implications on the future credit ratings of the country and could also make future borrowing more expensive. Also, the impulse response functions showed a mixed result of the adjustments in reserves build-up to the predictions of empirical theories and findings. Additionally, the analysis proved the long-run test of restriction of exchange rate depreciation on positive reserves build-up of the central bank. However, the short-run adjustments of the exchange rates on reserves rejected this relationship. Furthermore, the decomposition analyses showed that short-run variations in reserves are explained by external forces, whereas the long-run variations are explained through the financial sector and partly by external forces. Therefore, an econometric specification of reserves beyond three months must specify in the model both the financial sector and external sector variables.

We use a VEC model to analyse China's “new normal” and how they affect aggregate components of China's balance of payment account, which represents China and the rest of the world. We assessed whether the tightening financial conditions impact China's long‐run growth. We also assessed the reduction in savings and its effect on growth. We further assess the claim of increasing net capital flows through a stable currency. We also compute China's currency gains and losses in CFET countries using the approach in and analysed how reducing national savings will impact on currency gains in the FX market. Analysing the fluctuations in capital flows, and its determinants, are significant for the restructuring since the government has undertaken to reduce his participation in direct financing. The research found that the gradual tightening of monetary policy if core inflation continues to pick up will not affect the long run current account growth, whereas reduced savings will have a short‐run adverse effect on growth. These conclusions support the assertion in. Furthermore, the liberalization of the financial systems reduces growth in the short run, whereas the fluctuations in renminbi have no impact on the capital account. We, therefore, do not find evidence of currency stability, aiding and facilitating net capital flows. Also, the decision to tighten policy rates and the effects on the capital account depends on the margin of the change. Lastly, the liberalization reforms will increase currency gains and also trigger currency appreciations.

Using Least Square Residual Minimization techniques, this paper develops an optimal reserve model, known as the OPREM model, which is essential in optimizing the costs of reserve holding. The paper also sets-out to test and compare the relative predictions of economic trends of the OPREM model as well as the predictions of alternative models in literature. Establishing the predictive accuracy of economic trends of these models are crucial for the gradual and cost-effective accumulation of reserves. The research concludes that, the decision to optimize the cost of reserves under a stable currency environment is reliant on the gold impact factor and not on inflation or interest rates. We also found on further analysis of the OPREM that the OPREM model is better positioned to eliminate the procyclicality and perverse rush in reserve build-ups experienced in developing and emerging countries by effectively setting the reserve stock against economic trends. The research fixes the optimal reserves around a benchmark of 0.7–1.2 of previous year's optimal value. However, in the absence of past optimal values, a benchmark between 2 and 6 times of average inflows for short-term analysis or analysis with small data observations. However, for long-term analysis or analysis with large data frequency (i.e., exceeding 13 data observations), the reserve stock should be fixed on a benchmark of 2–9 times of the average inflows.