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Demand for Foreign Exchange Reserves in India: A Co-integration Approach

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  • Prabheesh, K P
  • Malathy, D
  • Madhumathi, R

Abstract

Using cointegraion and vector error correction approach, we estimate India’s demand for foreign exchange reserves over the period 1983:1-2005:1. Our results establish that the ratio imports to GDP, the ratio of broad money to GDP,exchange rate flexibility and interest rate differential determine India’s long-run reserves demand function. Our empirical results show that reserve accumulation in India is highly sensitive to capital account vulnerability and less sensitive to its opportunity cost. The speed of adjustment coefficient of vector error correction model suggests that Reserve Bank of India has to engage in more active reserve management practices.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13969.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:13969

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Keywords: foreign exchange reserves; capital account vulnerability; current account vulnerability; cointegration;

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References

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  1. Marc-André Gosselin & Nicolas Parent, 2005. "An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia," Working Papers, Bank of Canada 05-38, Bank of Canada.
  2. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 9(4), pages 1148-66, December.
  3. Edwards, Sebastian, 1984. "The Demand for International Reserves and Monetary Equilibrium: Some Evidence from Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 66(3), pages 495-500, August.
  4. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, American Economic Association, vol. 60(4), pages 655-67, September.
  5. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers, International Monetary Fund 02/62, International Monetary Fund.
  6. 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, Elsevier, vol. 53(1-3), pages 211-244.
  7. 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, Elsevier, vol. 18(1), pages 107-131, January.
  8. Ramachandran, M., 2004. "The optimal level of international reserves: evidence for India," Economics Letters, Elsevier, Elsevier, vol. 83(3), pages 365-370, June.
  9. Clark, Peter B, 1970. "Optimum International Reserves and the Speed of Adjustment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 78(2), pages 356-76, March-Apr.
  10. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 2(2), pages 111-120, July.
  11. John F. O. Bilson & Jacob A. Frenkel, 1979. "Dynamic Adjustment and the Demand for International Reserves," NBER Working Papers 0407, National Bureau of Economic Research, Inc.
  12. Renu Kohli, 2004. "Capital Account Liberalisation: Empirical Evidence and Policy Issues II," International Finance, EconWPA 0405009, EconWPA.
  13. Frenkel, Jacob A, 1974. "The Demand for International Reserves by Developed and Less-Developed Countries," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 41(161), pages 14-24, February.
  14. Ford, J L & Huang, Guobo, 1994. "The Demand for International Reserves in China: An ECM Model with Domestic Monetary Disequilibrium," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 61(243), pages 379-97, August.
  15. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
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Cited by:
  1. Eliza, Nor & M., Azali & Law, Siong-Hook & Lee, Chin, 2008. "Demand For International Reserves in ASEAN-5 Economies," MPRA Paper 11735, University Library of Munich, Germany.

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