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Impact of macroeconomic variables on foreign exchange reserves: A case from Pakistan

Author

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  • Muhammad Azeem
  • Muzammil Khurshid

    (Department of Management Science, University of Central Punjab, Gujranwala Campus, Gujranwala, Pakistan
    Department of Management Sciences, University of Central Punjab, Sialkot Campus, Sialkot, Pakistan)

Abstract

The study aims to investigate the effect of macroeconomic indicators on foreign reserves in Pakistan. A Vector Autoregressive (VAR) model has been used to estimate Pakistan’s foreign exchange reserves demand from the period of 1984 to 2015. Findings/Originality: The results indicate that macroeconomic variables such as remittances, exchange rate, the ratio of current account deficit to GDP and interest rate differential (measure as opportunity cost) determine the country’s long-run reserves demand function. Whereas, observed results show that demand of foreign reserves is highly sensitive to capital account vulnerability and less responsive to its opportunity cost. The Granger causality analysis shows that the various macroeconomic variables fail to cause reverse causality. It implies that in Pakistan the demand of reserves is driven by macroeconomic stability. The study is helpful for the country’s institutions to boost foreign reserves by controlling macroeconomics indicators.

Suggested Citation

  • Muhammad Azeem & Muzammil Khurshid, 2019. "Impact of macroeconomic variables on foreign exchange reserves: A case from Pakistan," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 11(2), pages 173-182, October.
    • Handle: RePEc:uii:journl:v:11:y:2019:i:2:p:173-182
    DOI: 10.20885/ejem.vol11.iss2.art5
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    More about this item

    Keywords

    Granger Causality; Foreign Exchange Reserves; Co-Integration; Capital Account Vulnerability; Current Account Vulnerability;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics

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