Empirical Analysis of the Impact of Foreign Exchange Reserves to Economic Growth in Emerging Economics

Borivoje D. Krušković, Tina Maričić


In this paper we analyzed the effect of the accumulation of foreign exchange reserves to economic growth in emerging countries. In order to empirical estimates of the impact of foreign exchange reserves to economic growth in emerging countries, were collected annual data on real GDP per capita, share of investment in GDP and population from the database of the International Monetary Fund (IMF WEO) in October 2013, while data from the level of foreign exchange reserves statistics collected from the relevant central banks. For a balanced panel data for Brazil, China and Russia, for the period from 1993 to 2012, estimated the relationship between economic growth and changes in foreign exchange reserves by applying the method includes the ONK with fixed individual effects. The empirical results in this paper suggest that the increase in foreign exchange reserves causes the growth of GDP, while in the opposite direction causality has not been proven. Exchange rate depreciation that occurs as a result of the accumulation of foreign exchange reserves is not inflationary because it is a one-time, non-persistent shock, unlike the sudden depreciation of the exchange rate that occurs as a result of maintaining an overvalued exchange rate in the long term and leads to currency crisis. The accumulation of foreign exchange reserves does not lead to inflation if the rate of accumulation of foreign exchange reserves does not exceed the rate of economic growth. Slightly higher inflation is not necessarily harmful, particularly for developing economics and emerging economics.

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DOI: https://doi.org/10.11114/aef.v2i1.653


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