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The Optimal Demand For Foreign Exchange Reserves In Pakistan

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  • JALIL, Abdul

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  • BOKHARI, Sheharyar
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    Abstract

    Using monthly data on foreign exchange reserves from June 1995 through June 2005, we find that in line with other country-specific studies the opportunity cost of holding reserves played a greater role than reserve volatility in determining the level of reserves in Pakistan. Our finding is in contrast with the hypothesis of increased capital mobility that is commonly set forth in explaining the precautionary motive for reserve holdings. As also pointed by Ramachandran (2004), this result could perhaps be attributed to the fact that capital outflow in Pakistan (as also in India) is not as free as capital inflow and a large part of the recent reserve accumulation is due to non-debt reserve inflows.

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    Bibliographic Info

    Article provided by Euro-American Association of Economic Development in its journal International Journal of Applied Econometrics and Quantitative Studies .

    Volume (Year): 5 (2008)
    Issue (Month): 1 ()
    Pages: 33-48

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    Handle: RePEc:eaa:ijaeqs:v:5:y2008:i:1_3

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    Related research

    Keywords: Foreign Exchange Reserves; Optimal Demand; GARCH; Pakistan;

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    1. Aizenman, Joshua & Marion, Nancy, 2003. "The high demand for international reserves in the Far East: What is going on?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 370-400, September.
    2. Ramachandran, M., 2004. "The optimal level of international reserves: evidence for India," Economics Letters, Elsevier, vol. 83(3), pages 365-370, June.
    3. Karim Khan & Eatzaz Ahmed, 2005. "The Demand for International Reserves: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(4), pages 939-957.
    4. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, vol. 60(4), pages 655-67, September.
    5. Antonio Francisco Silva Jr. & Érica Domingos da Silva, 2004. "Optimal International Reserves Holdings In Emerging Markets Economies: The Brazilian Case," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 078, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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