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The Demand for International Reserves: A Case Study of Pakistan

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Author Info

  • Karim Khan

    (Pakistan Institute of Development Economics, Isalamabad.)

  • Eatzaz Ahmed

    (Quaid-i-Azam University, Islamabad.)

Abstract

Reserves-holding policy has been a main area of concern for policy-makers, researchers, and planners since the beginning of the Bretton Woods system. As a result, issues related to the equilibrium of international reserves, its determinants, and the departure from equilibrium have been widely discussed in the debates of economic policy-making. In spite of its importance, no serious attempt has been made to work on the determinants of international reserves in the case of Pakistan. Therefore, we have made an endeavour to determine the long-run and short-run determinants of Pakistan’s international reserves-holding and, hence, we hope to contribute to the literature on reserves in the case of Pakistan. We have also considered the role of monetary disequilibrium in the short-run, along with the other determinants in the explanation of international reserves-holding. In the context of cointegration-error correction framework, we have analysed Pakistan’s reserve demand using the quarterly data over the period 1982:1-2003-2 and found that there exists a stable long-run reserves demand function in the case of Pakistan. The results also confirm the role of domestic monetary disequilibrium for changes in reserves in the short-run

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 44 (2005)
Issue (Month): 4 ()
Pages: 939-957

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Handle: RePEc:pid:journl:v:44:y:2005:i:4:p:939-957

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  1. Iyoha, Milton Ame, 1976. "Demand for International Reserves in Less Developed Countries: A Distributed Lag Specification," The Review of Economics and Statistics, MIT Press, vol. 58(3), pages 351-55, August.
  2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  3. J. M. Landell-Mills, 1989. "The Demand for International Reserves and Their Opportunity Cost," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 708-732, September.
  4. Frenkel, Jacob A, 1974. "The Demand for International Reserves by Developed and Less-Developed Countries," Economica, London School of Economics and Political Science, vol. 41(161), pages 14-24, February.
  5. Philip Lane & Dominic Burke, 2001. "The Empirics of Foreign Reserves," Open Economies Review, Springer, vol. 12(4), pages 423-434, October.
  6. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, vol. 60(4), pages 655-67, September.
  7. Joshua Aizenman & Nancy P. Marion, 2002. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," NBER Working Papers 9154, National Bureau of Economic Research, Inc.
  8. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1148-66, December.
  9. Harald Badinger, 2004. "Austria's Demand for International Reserves and Monetary Disequilibrium: The Case of a Small Open Economy with a Fixed Exchange Rate Regime," Economica, London School of Economics and Political Science, vol. 71, pages 39-55, 02.
  10. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  11. Huang, Tai-Hsin & Shen, Chung-Hua, 1999. "Applying the seasonal error correction model to the demand for international reserves in Taiwan," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 107-131, January.
  12. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June.
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Cited by:
  1. JALIL, Abdul & BOKHARI, Sheharyar, 2008. "The Optimal Demand For Foreign Exchange Reserves In Pakistan," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 5(1), pages 33-48.

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