An investigation of the determinants of foreign exchange reserves in Southern African countries
The controversy whether the “fear of floating” or the “fear of capital mobility” determines a country’s foreign reserve holdings is an ongoing research debate. This issue remains unresolved in global economic and finance studies. This study has the aim to contribute to the ongoing debate by probing the determinants of foreign exchange reserves in Southern African countries. This study makes use of the annual data sets over the period of 26 years from 1990 to 2015, with the application of the ARDL approach within a panel econometric framework. Variables included in the model are foreign reserves, capital inflows, exports, inflation, exchange rate and imports. The empirical findings show the existence of cointegration amongst the studied variables. The findings show that exports, inflation rate, exchange rate and imports are significant determinants of foreign reserve holdings in the long run and with all the variables having positive impacts, except for import demand. Meanwhile, capital inflow was found to be a non-significant determinant of reserve holdings in the long run. Evidence from the short-run analysis shows that all the independent variables, with the exception of exchange rate, do not significantly determine reserve holdings. The study concludes that “fear of floating” rather than “fear of capital” is a significant driver or determinant of foreign reserves in Southern African countries.
1. Aizenman, J. & Marion, N. (2002). International reserve holdings with sovereign risk and costly tax collection. Retrieved September 24, 2017. https://ideas.repec.org/p/nbr/nberwo/9154.html.
2. Aizenman, J. & Marion, N. (2004). International reserve holdings with sovereign risk and costly tax collection. The Economic Journal, 114(497), 569-591.
3. Aizenman, J. (2011). Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008–2009, and a cost benefit analysis. Journal of Economic Dynamics and Control, 35(9), 1502-1513.
4. Aizenman, J., Jinjarak, Y. & Park, D. (2011). International reserves and swap lines: Substitutes or complements? International Review of Economics & Finance, 20(1), 5-18.
5. Buiter, W. & Grafe, C. (2002). Anchor, float or abandon ship: Exchange rate regimes for the accession countries. EIB papers, 7(2), 51-71.
6. Bussière, M., Cheng, G., Chinn, M.D. & Lisack, N. (2015). For a few dollars more: Reserves and growth in times of crises. Journal of International Money and Finance, 52, 27-145.
7. Calvo, G.A. & Reinhart, C.M. (2002). Fear of floating. The Quarterly Journal of Economics, 117(2), 379-408.
8. Chakravarty, S.L. (2008). The optimal level of international reserves: the case of India. Retrieved September 12, 2017. www.igidr.ac.in/conf/money/.
9. Cheung, Y.W. & Ito, H. (2009). A cross-country empirical analysis of international reserves. International Economic Journal, 23(4), 447-481.
10. Cheung, Y.W. & Sengupta, R. (2011). Accumulation of reserves and keeping up with the Joneses: The case of LATAM economies. International Review of Economics & Finance, 20(1), 19-31.
11. Choi, W.G., Sharma, S. & Strömqvist, M. (2009). Net capital flows, financial integration, and international reserve holdings: The recent experience of emerging markets and advanced economies. IMF Staff Papers, 56(3), 516-540.
12. Czech, K.A. & Waszkowski, A. (2012). Foreign exchange market efficiency. Empirical results for the USD/EUR market. Financial Internet Quarterly „e-Finanse”, 8(3), 1-9.
13. Dominguez, K.M. (2012). Foreign reserve management during the global financial crisis. Journal of International Money and Finance, 31(8), 2017-2037.
14. Dominguez, K.M., Hashimoto, Y. & Ito, T. (2012). International reserves and the global financial crisis. Journal of International Economics, 88(2), 388-406.
15. Dooley, M.P., Folkerts‐Landau, D. & Garber, P. (2004). The revived Bretton Woods system. International Journal of Finance & Economics, 9(4), 307-313.
16. Fischer, S. (2001). Exchange rate regimes: is the bipolar view correct? Journal of Economic Perspectives, 15(2), 3-24.
17. Frankel, J. (2005). On the renminbi: the choice between adjustment under a fixed exchange rate and adjustment under a flexible rate (№w11274). National Bureau of Economic Research. Retrieved September 16, 2017. http://www.nber.org/papers/w11274.
18. Gosselin, M.A. & Parent, N. (2005). An empirical analysis of foreign exchange reserves in emerging Asia. Montreal, Quebec: Bank of Canada. Retrieved August 12, 2017. https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp05-38.pdf.
19. Levy-Yeyati, E., & Sturzenegger, F. (2007). Fear of floating in reverse: exchange rate policy in the 2000s. In LAMES-LACEA Annual Meetings. Retrieved August 14, 2017. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.77.3185&rep=rep1&type=pdf.
20. Mishkin, F.S. (1999). Lessons from the Asian crisis. Journal of International Money and Finance, 18(4), 709-723.
21. Mishra, R.K. & Sharma, C. (2011). India's demand for international reserve and monetary disequilibrium: Reserve adequacy under floating regime. Journal of Policy Modeling, 33(6), 901-919.
22. Park, Y.C., Chung, C.S. & Wang, Y. (2001). Fear of floating: Korea's exchange rate policy after the crisis. Journal of the Japanese and International Economies, 15(2), 225-251.
23. Pesaran, M.H., Shin, Y. & Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
24. Pina, G. (2015). The recent growth of international reserves in developing economies: A monetary perspective. Journal of International Money and Finance, 58, 172-190.
25. Pontines, V. & Rajan, R.S. (2011). Foreign exchange market intervention and reserve accumulation in emerging Asia: Is there evidence of fear of appreciation? Economics Letters, 111(3), 252-255.
26. Prabheesh, K.P. (2013). Optimum international reserves and sovereign risk: Evidence from India. Journal of Asian Economics, 28, 76-86.
27. Ramachandran, M. (2004). The optimal level of international reserves: evidence for India. Economics Letters, 83, 365–370.
28. Ramachandran, M. (2006). On the upsurge of foreign exchange reserves in India. Journal of Policy Modeling, 28(7), 797-809.
29. Steiner, A. (2013). The accumulation of foreign exchange by central banks: Fear of capital mobility?. Journal of Macroeconomics, 38, 409-427.
30. Taguchi, H. (2011). Monetary autonomy in emerging market economies: The role of foreign reserves. Emerging Markets Review, 12(4), 371-388.
31. Williamson, J. (2002). Future Exchange Rate Regimes for Developing East Asia: Exploring the Policy Options1. Asian Economic Recovery: Policy Options for Growth and Stability, 83-109.