Investigating the efficiency of foreign exchange reserves using stochastic frontier analysis: Evidence across the globe

Abstract

The purpose of this paper is to analyse the efficiency of the use of foreign exchange reserves (FER) by 21 nations over 5 years across the globe. The study follows an analytical research design to analyse the efficiency levels in the use of foreign exchange reserves using stochastic frontier analysis (SFA). Three models under SFA, that is, Cobb-Douglas production frontier for panel data with half-normal distributions, translog production frontier with panel data assuming truncated normal distributions and total technical efficiency effects model with panel data, have been used to study efficiency levels. The research uses the nominal value of exports and foreign direct investment as inputs and foreign exchange reserves as output. The results indicate that out of 21 nations, developing countries are found to be more efficient in comparison to developed countries in the use of FER.