Empirical Evidence on Dynamics of Credit Growth and Foreign Reserve

Abstract

The paper presents a model for looking into the nature of change in foreign reserve from movements in domestic credit. This model is relevant to foreign reserve targeting, small and open economies. The model denotes that measures undertaken by central banks to constraint domestic credit growth with the view of controlling capital outflows will also be detrimental to foreign reserves level. The empirical studies with application of Fourier Transformation technique have been used to build a model, which shows that growth in domestic credit is more biased towards positive swings in foreign reserves, rather than being unfavorable. The small and open economies, particularly, the Pacific Island nations, have the right set up for application of this model to safeguard foreign reserves level.

Empirical Study of Relationship between Money Supply and Inflation Based on Data from New Standardised Reporting Format

“…The inflow of foreign reserves increases money supply and central bank will control this through sterilisation, in cases of fixed exchange rate regime (Sinah, 2017). Sterilisation will take place in form of central bank absorbing money supply by issuing treasury bills or other papers at interest rate agreed in money market.…”