The demand for international reserves in a regime of floating exchange rates: Some empirical evidence

In this note the demand for international reserves during the recent float is analysed using a pooled cross-section, time-series data base. The main objective of the analysis is to demonstrate the importance of stochastic shocks in determining the demand for international reserves in a regime of floating exchange rates.     

Demand for international reserves: a review article

This paper examines the twofold role of the labour market in household economic risk management: as a source of household consumption risk, and as an instrument for insuring consumption against contingencies. It outlines a framework for analysing this twofold role of the labour market, and uses data from the British Household Panel Survey 1991–1996 to explore this empirically. It identifies the relative importance of the labour market, and other factors, in producing changes in the financial situation of individuals. It also implements ‘full insurance’ tests of whether unemployment and other external shocks to the household are correlated with consumption growth. It concludes that labour market factors are a dominant source of change in individuals financial situation, with a predominantly positive effect on the financial situation of the better off, and a predominantly negative impact on the financial situation of the less well off. It also finds that households are unable to fully insure their consumption against unemployment, and that as a result labour market factors pose a significant economic risk.     

Asymmetric stabilizing impact of international reserves

This article studies international reserves’ nominal exchange rate stabilizing impact in emerging markets and developing countries, with a particular focus on its nonlinearity and asymmetry across different states of the economy. Using the fixed-effects and dynamic panel threshold models, we find the reserves to short-term debt threshold ratio after which the marginal stabilizing effect of reserves begins to fall during tranquil times. Such diminishing returns, however, do not appear to exist even at the excessive level of reserves during the global financial crisis, partly justifying precautionary demand for international reserves. These results call for extending reserve pooling or swap arrangements to enhance efficiency of reserve management by holding adequate, rather than excess, international reserves with an access to emergency lending during the crisis.     

LDC participation in international financial markets: Debt and reserves

This paper analyzes LDC borrowing and reserve-holding behavior as part of a general equilibrium portfolio problem. Estimates of LDC debt and reserve demand and credit supply suggest that debt, along with reserves, serves a transactions role. Another finding is that most LDC borrowers are credit constrained. An analysis of LDC export behavior suggests that defaults are likely to be independent, uncorrelated phenomena.     

Kalman filter approach to estimate the demand for international reserves

A few studies have provided empirical support for the fact that the demand for international reserves experienced structural instability in 1973 and 1979 due to a change in exchange rate system and oil price shocks. Thus, under the current managed float due to exchange rate and oil price fluctuations, coefficient estimates could be time dependent. After showing that indeed, estimated coefficients are time dependent, the Kalman filter estimation method is employed and the reserve demand function for 19 industrial countries estimated. The Kalman filter approach incorporates the time-varying properties of coefficients estimates.     

Predictor imperfection: international evidence

Pástor and Stambaugh (2009) demonstrate that the relationship between predictors and equity premium is imperfect in US market using a new model named predictive system. This article extends their study by providing international evidence of predictor imperfection using samples from G7 countries. Our results show that predictor imperfection is ubiquitous in all G7 countries and that investors’ prior beliefs about the relationship between predictors and equity premium play a significant role in predictor’s explanatory power.     

Effects of exchange rate flexibility on the demand for international reserves

We incorporate a measure of exchange rate flexibility into the standard reserve demand equation and present empirical results for the 1976–1985 period which are consistent with the work of Officer (1976) and Frenkel and Jovanovic (1981) indicating the existence of economies of scale and the demand for reserves.     

Hoarding of international reserves: It's a neighbourly day in Asia

To explain why Asian countries seem to have been hoarding international reserves, especially since the 1997 crisis, we consider various regional neighbourhood effects. One such effect is that of “catching up with the Joneses”. We revisit that effect by analysing several refinements of it. We also consider the fear of the kind of contagion that the crisis‐hit countries saw in 1997. Finally, we look at the possibility of a regional financial cycle, in which the conditions that led to the crisis might have been correlated across countries. We find that refining the Joneses effect to take account of trade links strengthens its power to explain the build‐up of reserves. We also observe that a country that finds itself more vulnerable than its regional neighbours would tend to accumulate more reserves. Finally, we find that a common regional factor related to current‐account balances spurs further reserve accumulation. Contrary to previous analyses, our results suggest that only a couple of Asian countries have been holding excessive reserves. Some were actually holding less reserves than would be optimal in the presence of neighbourhood effects.     

Impact of terrorism on tourism in Turkey: empirical evidence from Turkey

This article aims at investigating the causal impact of terrorist attacks on the tourism industry in Turkey based on the Autoregressive Distributed Lag (ARDL) bounds testing procedure for the period between 1986 and 2006. The ARDL bounds test reveals that tourism is in a long-run equilibrium level relationship with terrorism. The evidence obtained from the long-run and short-run parameter estimates indicates the existence of a negative causal effect of terrorism on tourism.     

Foreign subsidiaries as a channel of international technology diffusion: Some direct firm level evidence from Belgium

The use of foreign direct investment as a channel of international spillovers is by now fairly established in the empirical literature on innovation and growth. It is often argued that subsidiaries of foreign multinational enterprises are a mechanism through which technological know-how flows across borders. For foreign subsidiaries to be channels of international spillovers, these subsidiaries need to source know-how internationally and transfer their know-how to the local economy. Using direct firm level evidence from the Belgian Community Innovation Survey on the occurrence of technology transfers, we find that foreign subsidiaries are indeed more likely to acquire technology internationally. But after controlling for the superior access to the international technology market that foreign subsidiaries enjoy, we find that these firms are not more likely to transfer technology to the local economy as compared to local firms.     

The determinants of international reserves in the emerging countries: a nonlinear approach

In this article, we adopt a nonlinear approach to examine the dynamics of the international reserves holdings by the emerging economies. To do so, we estimate the demand for international reserves with a Panel Smooth Transition Regression (PSTR) model that loosens two restricting hypotheses, homogeneity and time-stability. We find evidence for the presence of a nonlinear behaviour in the demand for international reserves, a result that is new to the literature. The coefficients are found to change smoothly, as a function of two threshold variables – out of five candidates tested in total. Our specification accounts for the acceleration of foreign exchange reserves accumulation that the linear specifications fail to explain.     

The non-linear impact of monetary policy on international reserves: macroeconomic variables nexus

This paper employs panel smooth transition regression models to investigate the nonlinear effects of two monetary policy proxies (i.e., real exchange rate return and real interest rate differential) on the international reserves—macroeconomic variables nexus. The panel data set includes the fourteen G-20 countries during the period 1991–2012. Empirical results show that the marginal effects of the macroeconomic variables (savings, terms of trade, public debt, capital account liberalization, economic growth, and trade openness) on international reserves are non-linear and vary with time, the proxies and countries, not linear and constant derived from traditional linear model. Currency devaluation policy (against the US dollar) can non-linearly enlarge the positive contribution of trade openness and public debt on international reserves, and non-linearly reduce the negative impact of terms of trade on international reserves, as the Marshall–Lerner condition holds. Expansionary monetary policy (through the decrease in domestic interest rates) can strengthen the positive effects of public debt, trade openness, and economic growth on international reserves. The precautionary and mercantilist views of reserves holdings are partially supported.     

The determinants of privatization prices: evidence from Turkey

This paper analyses the determinants of privatization prices in a multi-industry study using a sample of 68 recently privatized firms from Turkey. Results show that revenue and market characteristics are significant determinants of privatization prices while current cost and profit indicators are not. It is argued that potential buyers regard these state firms as inefficient, therefore do not take into consideration their current costs and profits in determining their value. When the dependent variable is altered by dividing the firm's privatization price by the firm's sales (revenues), it is found that sales-adjusted privatization prices are responsive to firms profit margins. However, this result does not hold when the sample is restricted to a single industry. Profit margins along with other profitability and firm efficiency measures are no longer significant determinants of sales-adjusted privatization prices in the cement industry analysis. Unexploited production opportunities measured by capacity utilization ratios, and complete private ownership resume a more important role.     

Impact of hurricanes strikes on international reserves in the Caribbean

ABSTRACT

In this study, we investigate the impacts of hurricane shocks on the international reserves of Caribbean countries. To this end, we use a panel VARX (Vector Auto-Regressive, with exogenous variables) with monthly data that allow us to account for external shocks (hurricane strikes). Our results show that for the whole sample, an increase in foreign reserves a month after the strike was followed by a decrease 2 months later. The increase can be explained by remittances and emergency foreign aid granted by the International Monetary Fund. Dividing the sample into middle-income and high-income countries shows that the increase is mainly due to the latter. This outcome may not be surprising given that production in Caribbean high-income countries is mainly due to manufacturing, off-shore banking and natural resources exploitation, which are all non-weather dependent sectors, while the middle-income countries are mostly dependent on weather-prone agriculture and tourism.     

Saving and inflation: Some international evidence

This note contains empirical results for the ‘disequilibrium’ saving function specification, in which uncertainty about relative prices in a cross-section sense plays a major role. Quarterly time series evidence from several OECD countries over the period 1967(II)–1980(III) lies in striking conformity with the view - suggested particularly by Deaton - that there is a positive relationship between unanticipated inflation and the saving ratio.     

The role of international reserves holding in buffering external shocks

An extended literature analyses the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This article devotes more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of nine emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995–2003 and 2004–2013. We implement threshold VAR model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.     

Institutional framework and economic development: international evidence

This paper examines the effect of ‘quality’ of the institutional framework on economic development. Our empirical results support the hypothesis that ‘good’ institutions improve efficiency and accelerate growth. The positive effect of institutional ‘quality’ is more pronounced with mutually reinforcing support of economic freedom. Our results also indicate that ‘good’ institutions help developing countries grow faster to achieve conditional convergence. We infer from the results that economic development requires not only physical and human capital formation, but also freedom to choose and institutional support.     

National culture and financial literacy: international evidence

ABSTRACT

We examine to what extent (aspects of) national culture can explain cross-country variations in financial literacy. Our results, for a sample of 92 countries, show that Hofstede’s dimensions of power distance and individualism explain, respectively, over 40 and 60 per cent – which is substantially more than national cognitive scores and standard economic variables. In particular, we find that financial literacy is lower in countries where power distance is high, and that the opposite is true for individualism. Uncertainty avoidance would seem be negatively related with financial literacy, but the evidence is not so strong. For masculinity, indulgence, and long-term orientation we find no significant impact. Overall, our results highlight the need for additional (interdisciplinary) theories that can improve our understanding of the determinants of financial literacy and better guide policies in this area.