Impact of macroeconomic variables on foreign exchange reserves: A case from Pakistan

Abstract

The study intends to investigate the impact of macroeconomic indicators on foreign reserves in the context of Pakistan. The Vector Autoregressive (VAR) model has been used to estimate Pakistan's foreign exchange reserves demand. It uses current account vulnerability, capital account vulnerability, exchange rate flexibility, and the opportunity cost of holding reserves as independent variables. Findings/Originality: The results indicate that macroeconomic variables such as remittances, exchange rate, the ratio of current account deficit to GDP, and interest rate differential (measure as opportunity cost) determine the country's long-run reserves demand function. Whereas, observed results show that demand for foreign reserves is highly sensitive to capital account vulnerability and less responsive to its opportunity cost. The Granger causality analysis probed that the various macroeconomic variables fail to cause reverse causality. It implies that in Pakistan, the demand for reserves is driven by macroeconomic stability. The study is helpful for the country's institutions to boost foreign reserves by controlling macroeconomics indicators.

Modelling the Demand for Indonesia’s Foreign Reserves

“…Moreover, the securities reserve holding is dominant, resulting in the central bank being more sensitive to the change in securities yields. Overall, the results of this research are not in line with most previous studies as outlined in the literature review section, such as Prabheesh et al(2007), Molapo and Thamae (2015), Sooriyan (2017), Azeem and Khurshid (2019), and Islam (2021), However, our results support the studies of Sinem and Nebiye (2014), Sanusi et al(2019), Rashid andBasit (2021), andTran andLe (2020). It seems that differences in measuring foreign reserve prices offer different conclusions.…”

“…Prabheeshet al (2007) and Sooriyan (2017) show that foreign reserve accumulation in India is less responsive to its opportunity cost. The same result is found in the case of Lesotho (Molapo and Thamae, 2015), Pakistan (Azeem and Khurshid, 2019), and Bangladesh (Islam, 2021). Oyeniran and Alamu (2020) show that the opportunity cost of holding reserves has an insignificant impact on Nigeria's optimal foreign reserves.…”

Determinants of Macroeconomic Effects on the Stability of Indonesia’s Foreign Exchange Reserve

“…This research is in line with Safitri Yunella and Dewi Zaini, who explained that exports significantly positively affect foreign exchange reserves [1]. The higher the exports carried out by a country, the more its foreign exchange reserve will increase [2,3]. The export increase demonstrates the absence of reliance on one country by another.…”

“…Foreign exchange reserves are an indicator that can be used to measure a country's international trade so that it can be known how resilient or weak a country's economy is [1]. In addition, the country's foreign exchange reserve buffers against current account weakness [2]. Since foreign exchange reserves are a source of funds for the country that will subsequently be used for international financing transactions, they are considered the most important indicators of the country's economy, especially in the export and import industries.…”

The Impact of Macroeconomic Indicators on Indonesia’s Foreign Exchange Reserve Position

“…One of the certainties for monetary and macroeconomic stability in a country is a country with sufficient foreign exchange reserves (Tambunan, 2001:158). According to Azeem and Khurshid (2019), a country's foreign exchange reserves act as a buffer against current account weaknesses. Because foreign exchange reserves are one source of funds for a country that would subsequently be used to finance international transactions, they are regarded as the most important indicator of the country's economic strength, particularly in the export and import industries (Azar and Aboukhodor, 2017).…”