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Precautionary and mercantilist approaches to demand for international reserves: an empirical investigation in the Indian context

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

Abstract

This paper empirically investigates the importance of precautionary and mercantilist approaches to international reserves in the Indian context using monthly data from 1993:06 to 2007:03. The ARDL approach to cointegration is used to estimate as in the long-run relationship between reserves and its determinants. The empirical results show that the impact of the volatility of Foreign Institutional Investment which captures the precautionary motive, and that of undervalued real exchange rate which is associated with the mercantilist view on reserves are statistically significant in the long run. We conclude that both the precautionary and mercantilist motives explain reserve accumulation in India over the study period.

Suggested Citation

  • K. P. Prabheesh & D. Malathy & R. Madhumathi, 2009. "Precautionary and mercantilist approaches to demand for international reserves: an empirical investigation in the Indian context," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 2(2), pages 279-291.
    • Handle: RePEc:taf:macfem:v:2:y:2009:i:2:p:279-291
    DOI: 10.1080/17520840902726367
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    References listed on IDEAS

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    1. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
    2. Reserve Bank of India, 2007. "Foreign Exchange Reserves," Working Papers id:1096, eSocialSciences.
    3. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series qt44g3n2j8, Center for International Economics, UC Santa Cruz.
    4. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt2tn4w8x6, Department of Economics, UC Santa Cruz.
    5. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
    6. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt44g3n2j8, Department of Economics, UC Santa Cruz.
    7. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
    8. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
    9. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Krittika Banerjee & Ashima Goyal, 2020. "Monetary spillovers and real exchange rate misalignments in emerging markets," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 17(2), pages 452-484, October.
    2. Aviral Kumar Tiwari & Phouphet Kyophilavong, 2017. "Exchange Rates and International Reserves in India," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 18(1), pages 76-93, March.
    3. Mishra, Ritesh Kumar & Sharma, Chandan, 2011. "India's demand for international reserve and monetary disequilibrium: Reserve adequacy under floating regime," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 901-919.
    4. Shijaku, Gerti & Dushku, Elona, 2017. "Foreign reserve holdings: an extended study through risk-inspired motives," MPRA Paper 79199, University Library of Munich, Germany.
    5. Shijaku, Gerti, 2012. "Optimal level of reserve holding: an empirical investigation in the case of Albania," MPRA Paper 79091, University Library of Munich, Germany.

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