The Demand for International Reserves: A Case Study of Pakistan

Khan, Karim; Ahmed, Eatzaz

doi:10.30541/v44i4iipp.939-957

Cited by 12 publications

(12 citation statements)

References 28 publications

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“…The study concludes that Pakistan's long-run reserves demand is a function of current account vulnerability, capital account vulnerability, exchange rate flexibility and the opportunity cost of holding reserves. These findings are in line with the study of Khan and Ahmed (2005) that concluded that imbalance in balance of payments and opportunity cost guide the policy related to reserves long run.…”

Section: Discussionsupporting

confidence: 90%

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

Azeem

Khurshid

2019

EJEM

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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.

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Section: Discussionsupporting

confidence: 90%

“…Moreover, reserves accumulation in India is less sensitive to its opportunity cost. Khan and Ahmed (2005) analyzed Pakistan's reserve demand using the quarterly data from the period 1982 to 2003. The study used co-integration and error correction framework.…”

Section: Introductionmentioning

confidence: 99%

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

Azeem

Khurshid

2019

EJEM

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“…Starting with a simple buffer model of Frenkel and Jovanovic (1981) and extending the model by adding openness and scale variables, Ra (2007) has investigated the Korean reserve demand model for the full sample period 1973-2005 and two sub-sample periods (pre-Asian crisis and post-Asian crisis). While many earlier studies such as Badinger (2004) and Khan and Ahmed (2005) have used the popular Johansen cointegration test to determine the long-run equilibrium, the paper has employed dynamic ordinary least square (DOLS) method developed by Saikkonen (1991) and Stock and Watson (1993). To understand the short-term dynamics, the paper has used an error correction mechanism.…”

Section: The Determinants Of the Demand For International Reservesmentioning

confidence: 99%

Macroeconomic determinants of the demand for international reserves in Bangladesh

Islam

2021

SN Bus Econ

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Recent financial crises have heightened the demand from emerging markets' and developing countries' central banks for international reserves that can meet their emergency foreign currency liquidity needs at times of halts in capital flow. The necessity of reserves for weathering external shocks is well documented in the literature. Likewise, macroeconomic factors to determine the level of reserves have been central to many empirical studies. Motivated by Bangladesh's stance in regard to reserve accumulation, we aim to investigate the macroeconomic determinants of the demand for international reserves in the country using quarterly data ranging from 1994Q2 to 2016Q4. We also examine the role of disequilibrium in the national money market in reserve movements during the same period. In addition, we check for a structural break associated with the exchange rate regime change in the reserves demand function. The Johansen cointegration test of reserve demand function reveals that the current account vulnerability and exchange rate flexibility play a crucial role in Bangladesh's long-term reserve demand policies. However, reserves appear to be insensitive to economic size and opportunity cost. A single equation error correction estimate suggests that the monetary disequilibrium does not play a significant role in the short-term reserve movements. More importantly, a dynamic ordinary least-squares estimate suggests that switching to the flexible exchange rate regime in 2003 contributes to a structural change in the long-term reserve demand policies of Bangladesh. Since the empirical results suggest that Bangladesh's reserve holding behavior is primarily driven by the precautionary motive, we propose that the country should continue to focus on increasing its reserve stock in relation to the current account vulnerability. Keywords International reserves • Average propensity of import • Monetary approach to the balance of payments • Monetary disequilibrium

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“…In the study real per capita GDP, the population level, the ratio of import to GDP, and the volatility of the exchange rate are found to be statistically significant determinants of real reserves. Khan and Ahmed (2005) analyzed the main determinants of reserves holding in Pakistan from 1982 to 2003 using quarterly data. The study estimated the long run co-integration relationship between reserves variable and other determinants such as balance of payments variability, money market rate, the average propensity to import, the level of imports and workers' remittances.…”

Section: Empirical Literature On the Determinants Of Foreign Reservesmentioning

confidence: 99%

An Autoregressive Distributed-Lag Modeling Approach to Nigeria’s External Reserves Dynamics

Shaibu¹,

Izedonmi²

2020

IJARBSS

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The objective of this study was to develop and analyze a regression model that explains the dynamics of foreign exchange reserves in Nigeria by examining the short-run and long-run impacts of some macroeconomic variables (exchange rate, inflation, interest rate, crude oil price, and real gross domestic product) on foreign reserves in Nigeria from 1986 to 2018. The data were sourced from the publications of the Central Bank of Nigeria (CBN) and World Bank. Unit root and co-integration tests were performed on the variables before estimation. An empirical multivariate autoregressive distributed-lag model (ARDL) was identified, specified, and estimated with the aid of EViews econometric software. Diagnostic tests for serial correlation (Breusch-Godfrey serial correlation LM test), normality (Jarque-Bera test), stability (CUSUM-of-squares test), and forecasting performance test were conducted to evaluate the estimated model. The study found that the estimated ARDL model could provide information on the behaviour of foreign exchange reserves in Nigeria. The regression results showed that none of the explanatory variables (exchange rate, inflation rate, interest rate, crude oil price, and real gross domestic product) shared contemporaneous and lagged relationship with foreign reserves dynamics in Nigeria. However, in the long run, only the previous value of foreign reserves was significant in explaining foreign reserves dynamics in Nigeria during the sample period. Given that foreign reserves play an important role in the design and evaluation of current and future macroeconomic policies aimed at achieving trade balance, the study makes the following recommendations: (1) government policies directed at managing and improving foreign reserves should largely consider the short-run and long-run behaviour of foreign reserves and these policies should be pursued with high degree of transparency because foreign reserves dynamics largely find explanation in adaptive expectation in Nigeria, (2) policy makers should ensure the

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The Demand for International Reserves: A Case Study of Pakistan

Cited by 12 publications

References 28 publications

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

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

Macroeconomic determinants of the demand for international reserves in Bangladesh

An Autoregressive Distributed-Lag Modeling Approach to Nigeria’s External Reserves Dynamics

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