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Long-Run And Short-Run Dynamics Of Foreign Exchange Reserves Flows And Domestic Credit In Pakistan

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  • KHAN, Muhammad Arshad

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Abstract

This study formulates and examines the monetary approach to the balance of payments by incorporating the currency substitution version of money demand function for Pakistan over the period 1962-2005 using FM-OLS and Johansen-Juselius cointegration techniques. The results suggest that real output, real exchange rate and domestic credit play an important role in the determination of foreign exchange reserves in Pakistan in long-as well in short-run. Moreover, the monetary authorities sterilize foreign exchange reserves by 12% in long-run and 66% in short-run. The results support the evidence of long-run causality running from reserves to domestic credit. One important policy implication from the empirical analysis is that the validity of the monetary approach to the balance of payments and the effectiveness of monetary policy depend on the nature of the money demand function. As the specification of money demand has changes the evidence based on monetary approach has also changes.

Suggested Citation

  • KHAN, Muhammad Arshad, 2008. "Long-Run And Short-Run Dynamics Of Foreign Exchange Reserves Flows And Domestic Credit In Pakistan," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 5(1), pages 61-78.
  • Handle: RePEc:eaa:ijaeqs:v:5:y2008:i:1_5
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    File URL: http://www.usc.es/economet/reviews/ijaeqs515.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:kap:empiri:v:45:y:2018:i:1:d:10.1007_s10663-016-9353-3 is not listed on IDEAS
    2. Bernhard Ozofere Ishioro, 2015. "The Long-Run Relationship between Foreign Reserves Inflows and Domestic Credit: Evidence from a Small Open Economy," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(2), pages 18-38, April.

    More about this item

    Keywords

    Monetary Approach; Foreign Exchange Reserves; Domestic Credit; Cointegration;

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General

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