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Determinants of Foreign Exchange Reserves in India: A Multivariate Cointegration Analysis

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Author Info

  • DASH, PRIYADARSHI

    (Research and Information System for Developing Countries (RIS), New Delhi)

  • NARAYANAN, K.

    (Indian Institute of Technology, Bombay)

Abstract

This paper attempts to identify the key determinants of foreign exchange reserves in India using Johansen (1995) Maximum-Likelihood Vector Error Correction Model (VECM) on monthly as well as annual data for reserves, imports and nominal exchange rate. The empirical results confirm that there exists a long-run cointegrating relationship among reserves, imports and nominal exchange rate. The shocks to imports and exchange rate have permanent effects on reserves, on level as well as volatility. Drawing inferences from these findings, it can be suggested that any target level of reserves could be feasible only in the short-run as the model produces a stationary equilibrium relationship among these three core variables of a standard reserve demand function.

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Bibliographic Info

Article provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.

Volume (Year): 46 (2011)
Issue (Month): 1 ()
Pages: 83-107

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Handle: RePEc:dse:indecr:0032

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Keywords: Reserves; Cointegration; Impulse Response;

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