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

Borivoje D. Krušković, Tina Maričić

Abstract


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.


Full Text:

PDF

References


Aizenman, J., Yothin, J., & Park, D. (2011). International reserves and swap lines: Substitutes or complements? International Review of Economics & Finance, 20(1). http://dx.doi.org/10.1016/j.iref.2010.07.002

Aizenman, J. (2007). Large Hoarding of International Reserves and the Emerging Global Economic Architecture. USCS and the NBER. http://dx.doi.org/10.3386/w13277

Alberola, E., & Serena, J. M. (2007). Global Financial Integration, Monetary Policy and Reserve Accumulation. Assessing the Limits in Emerging Economies. Banco de Espana, Documento de Trabajo.

Barbosa-Filho, N. H. (2008). Inflation Targeting and Monetary Policy in Brazil. International Review of Applied Economics.

Benigno, J., & Fornaro, L. (2012). Reserve accumulation, growth and financial crises. CEPR Discussion Papers, Centre for Economic Performance, LSE.

Bianchi, J., Hatchondo, J. C., & Martinez, L. (2013). International Reserves and Rollover Risk. IMF Working Paper, 33. http://dx.doi.org/10.5089/9781475571295.001

Chami, S., McGettigan, D., & Watt, S. (2007). Jordan’s International Reserve Position: Justifiably Strong, IMF Working Paper, Washington: International Monetary Fund.

Chang, R. (2007). Inflation Targeting, Reserves Accumulation and Exchange Rate Management in Latin America. Department of Economics, Rutgers University, New Brunswick.

Cheng, G. (2013). A Growth Perspective of Foreign Reserve Accumulation, Banque de France, Working Paper, 443.

Dominguez, K. M. E., Yuko, H., & Takatoshi, I. (2012). International Reserves and the Global Financial Crisis, NBER Working Papers.

Durdu, B., Mendoza, E., & Terrones, M. (2007). Precautionary Demand for Foreign Assets in Foreign Stop Economies: An Assessment of the New Mercantilism, mimeo.

Elhiraika, A., & Ndikumana, L. (2007). Reserves Accumulations in African Countries: Sources, Motivations and Effects.

Emmanuel, U. C. (2013). Foreign Exchange Reserves (Fer) Accumulation And Macro-Economic Stability: The Nigerian Experience. International Journal of Business and Management Invention.

Fukuda, S., & Kon, Y. (2010). Macroeconomic Impacts of Foreign Exchange Reserve Accumulation: Theory and International Evidence. ADBI Working Paper, Tokyo: Asian Development Bank Institute.

Ghosh, R., Ostry, J., & Tsangarides, C. (2012). Shifting motives: Explaining the buildup in official reserves in emerging markets since the 1980s, IMF Working Papers, IMF. http://dx.doi.org/10.5089/9781463933197.001

Goldberg, L., Hull, C. E., & Stein, S. (2013). Do Industrialized Countries Hold the Right Foreign Exchange Reserves? Federal Reserve Bank of New York.

Green, R., & Torgerson, T. (2007). Are High Foreign Exchange Reserves in Emerging Markets a Blessing or a Burden? Office of International Affairs Occasional Paper, 6.

Gupta, A. S. (2008). The Cost of Holding Excess Reserves: Evidence from India. Prepared for Presentation at the Brookings-NCAER India Policy Forum, New Delhi.

Jeanne, O., & Ranciere, R. (2011). The optimal level of international reserves for emerging market countries: A new formula and some applications, Economic Journal, 121(555). http://dx.doi.org/10.1111/j.1468-0297.2011.02435.x

Krušković, B. (2014). Monetary strategies, exchange rate and foreign exchange reserves, Economics Faculty, University of Banja Luka.

Obstfeld, M., Jay, S. C., & Taylor, A. M. (2010). Financial Stability, the Trilemma and International Reserves. American Economic Journal: Macroeconomics, 2(2).

Olayungbo, D. O., & Akinbobola, T. O. (2011). Foreign Exchange Reserves and Exchange Rates in Nigeria. Structural Breaks, Unit Roots and Cointegration tests. Journal of Social and Economic Development.

Osorio, P. C. (2007). The Motivation and Methodology for Breaking Foreign Reserves in Tranches. Central Bank of Colombia.

Pina, G. (2011). The Recent Growth of International Reserves in Developing Economies: A Monetary Perspective, Universitat Pompeu Fabra.

Polterovich, V., & Popov, V. (2007). Economic Growth, Real Exchange Rate and Inflation. New Economic School.

Polterovich, V., & Popov, V. (2002). Accumulation of Foreign Exchange Reserves and Long Term Growth, NES Working Paper.

Sell, F. L. (2007). Anticipated Effects of Foreign Currency Reserve Diversification in Asian Countries: Do Chima and India Matter for Coordination? CESifo Forum.

Sosunov, K., & Zamulin, O. (2006). The Inflationary Consequences of Real Exchange Rate Taregting via Accumulation of Reserves. Centre for Economic and Financial Research at New Economic School, Working paper, 82.

Steiner, A. (2010). Central Banks’ Dilemma: Reserves Accumulation, Inflation and Financial Instability. Grade School of Economic, A Social Sciences, University of Mannheim, Germany.

Truman, E. M. (2007). The Management of China’s International Reserves: China and a SWF Scoreboard. Peterson Institute for International Economics.

Usman, A., & Waheed, I. (2010). External Reserves Holding in Nigeria: Implications for Investment Inflation and Exchange Rate, Journal of Economics and International finance, 2(9).

Wen, Yi. (2011). Making sense of China’s excessive foreign reserves. Working Paper Series, Federal Reserve Bank of St. Louis

Wyplosz, C. (2007). The Foreign Exchange Reserves Buildup: Business as Usual? Graduate Institute of International Studies and CEPR.




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

Refbacks

  • There are currently no refbacks.


Paper Submission E-mail: aef@redfame.com

Applied Economics and Finance    ISSN 2332-7294 (Print)   ISSN 2332-7308 (Online)

Copyright © Redfame Publishing Inc.

To make sure that you can receive messages from us, please add the 'redfame.com' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders. If you have any questions, please contact: aef@redfame.com

-------------------------------------------------------------------------------------------------------------------------------------------------------------