Dependent variable is international reserves IR measured as total international reserves excluding gold. All the variables are taken in their real values.
We develop a model below relating international reserves to economic growth. Where, IR is total international reserves minus gold divided. Our objective is to see both short run and long run relationship between international reserves and economic growth. It is usual practice to check the stationarity issues in the analysis of time series data. All the variables were found non-stationary at level but after first differencing they became stationary showing the integration order of I 1.
Since all the variables showed the same order of integration they might be co-integrated. To check co-integration we applied Johansen co-integration test. The test suggested no co-integration. The results of Johansen co-integration are not reported here and available on request. After that we regressed the long run model. The model is shown below. As per this model the economic growth is found with expected positive sign and highly significant.
The Durbin-Watson statistics is less than R2 suggesting possible spurious regression model. But if the residuals of this model are found stationary at level then long run model will no longer be spurious. Moreover, stationarity of residuals will indicate that variables are co-integrated. We got the residuals of this model. The residuals are found stationary at level so long run model is no longer spurious.
Moreover, stationarity of residuals signals that variables are cointegrated suggesting for error correction mechanism ECM. Having obtained the long run model the next step is to estimate the coefficients of short run dynamics which have important implications.
Therefore, an error correction model will be estimated that incorporates the short term interactions and speed of adjustment towards long run equilibrium. The specification of error correction model is presented below:. Where all variables are defined as earlier. The expected sign of Ut - 1 is negative and it must be significant. Both the criteria suggested maximum lag length as two. The results of error correction model are provided as under:.
Equation 4 reports regression results of error correction model. The error correction term ECT is statistically significant and has the expected negative sign. This ECT provides a measure of average speed of adjustment at which economic growth adjust to a change in equilibrium condition. The absolute value of ECT signals that movement of economic growth towards eliminating disequilibrium within a year is At last, we performed the diagnostic tests to our model. This money can exit at a fast pace.
There are some differences among academics on the direct as well as indirect costs and benefits of the level of forex reserves, from the point of view of macro-economic policy, financial stability and fiscal or quasi-fiscal impact, former RBI Governor YV Reddy said in one of his speeches. George Mathew Sandeep Singh Hitting an all-time high of 1. What are forex reserves? Why are forex reserves rising despite the slowdown in the economy? The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
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Key Takeaways Foreign exchange reserves are assets denominated in a foreign currency that are held by a central bank. These may include foreign currencies, bonds, treasury bills, and other government securities.
This pushes down the value of the local currency since fewer people want it. That makes imports more expensive, creating inflation. The central bank supplies foreign currency to keep markets steady. It also buys the local currency to support its value and prevent inflation. This reassures foreign investors, who return to the economy.
A fourth reason is to provide confidence. The central bank assures foreign investors that it's ready to take action to protect their investments. It will also prevent a sudden flight to safety and loss of capital for the country.
In that way, a strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to safety.
Fifth, reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. They also include financing of imports and the ability to absorb any unexpected capital movements. Sixth, some countries use their reserves to fund sectors, such as infrastructure. China, for instance, has used part of its forex reserves for recapitalizing some of its state-owned banks. Seventh, most central banks want to boost returns without compromising safety.
They know the best way to do that is to diversify their portfolios. They'll often hold gold and other safe, interest-bearing investments. How much are enough reserves? At a minimum, countries have enough to pay for three to six months of imports. That prevents food shortages, for example. Another guideline is to have enough to cover the country's debt payments and current account deficits for 12 months. In , Greece was not able to do this.
The huge sovereign debt the Greek government incurred led to the Greek debt crisis. The countries with the largest trade surpluses are the ones with the greatest foreign reserves. They wind up stockpiling dollars because they export more than they import.
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