Exchange Rate Regime and Demand for Reserves: Evidence from Kenya,Mexico and Philippines |
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| Authors: | Taufiq Choudhry Mohammad Hasan |
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| Institution: | (1) School of Management, University of Southampton, Highfield, Southampton, SO17 1, BJ, UK;(2) Faculty of Organisation and Management, Sheffield Hallam University, City Campus, Pond Street, Sheffield, S1 1, WB, UK |
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| Abstract: | This paper empirically investigates the demand for international reserves (and foreign exchange reserves) during fixed and
floating exchange rates periods in three developing countries: Kenya, Mexico and Philippines. Based on theoretical models,
three factors are identified as important for the demand of international reserves and foreign reserves: average propensity
to import, volume of imports and variability of reserves. The paper employs the cointegration methodology and error correction
method to investigate the relationships. Cointegration tests results indicate a reliable long-run stationary relationship
between the international reserves (and foreign exchange reserves) and the stated explanatory variables across countries and
sub-periods of fixed and clean float. The error correction results indicate causality from the explanatory variables to the
reserves during both the short and long run. This is true during both the fixed and the floating periods.
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| Keywords: | International reserves Volatility Cointegration Exchange rate regimes |
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