An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh

Md. Niaz Murshed Chowdhury; Mohammed Jashim Uddin; Dr. Mohammad Saiful Islam

doi:doi:10.11648/j.jwer.20140306.12

| Peer-Reviewed

An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh

Md. Niaz Murshed Chowdhury, Mohammed Jashim Uddin, Dr. Mohammad Saiful Islam

Published in Journal of World Economic Research (Volume 3, Issue 6)

Received: 5 November 2014 Accepted: 12 November 2014 Published: 17 November 2014

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

This study undertakes an econometric analysis of the determinants of foreign exchange reserves. Yearly time series data have been used to figure out that type of relevant variables that are very much momentous for the determinants of foreign exchange reserves. This paper attempts to identify the key determinants of foreign exchange reserves in Bangladesh using Augmented Dicky Fuller (ADF) unit root test to examine the stationarity, Engle Granger residual based co-integration approach to show the co-integrating relationship among variables, and diagnostic tests for better modeling. The empirical results confirm that there exists a strong relationship among foreign exchange reserves, exchange rate, remittance, home interest rate, broad money 〖(M〗_2), UPI of export and import, and per capita GDP. The coefficients are found to change smoothly, as a function of seven threshold variables- out of nine candidates where six variables are statistically significant. Drawing inferences from these findings, it can be suggested that exchange rate, a strong remittance related policies, quality items of exports, and sustainable GDP can keep a substantial and feasible roles to make up a healthy amount of foreign exchange reserves for the host country like Bangladesh.

Published in	Journal of World Economic Research (Volume 3, Issue 6)
DOI	10.11648/j.jwer.20140306.12
Page(s)	72-82
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Co-Integration, ADF, Diagnostic Test, Imports, Broad Money and Foreign Exchange Reserves

References

[1]	Aizenman, J. and Lee, J. 2005. International Reserves: Precautionary verses Mercantalist Views: Theory and Evidence .NBER Working Paper No. 11366.
[2]	Aizenman, J., and Marion N.2002. The High Demand for International Reserves in the Far East: What's Going On? Working Paper, UC Santa Cruz and the NBER. College of Dartmouth.
[3]	Aizenman, J. and Lee,Y. and Rhee, Y. 2004. International Reserves Management and capital mobility: Policy Consideration and a Case Study of Korea. NBER Working Paper No. 10534.
[4]	Ali, M.M. and Medhekar, A. 2012 Management of Macro Economic Performance of Bangladesh: An Empirical Analysis, International Review of Business Research Papers, Vol. 8. No.1. Pp. 64 – 83.
[5]	Arize, A.C.2012. Foreign Exchange Reserves in Asia and Its Impact on Import Demand. International Journal of Economics and Finance, Vol.4, No.3.
[6]	Bangladesh Economic Update, 2012.Unnayan Onneshan, Vol-3, No.7 (July)
[7]	Batter, D. 1982 “Central Bank’s Demand for Foreign Reserves Under Fixed and Floating Exchange Rates”. Federal Reserve Bank of St. Louis, 1982.
[8]	Calvo, Guillermo and Reinhart, Carmen.2000. “Fear of Floating” NBER Working Paper No-7993.
[9]	Chowdhury, K.R. , Hamid, F and Chatterjee D.D. 2010.Remittance as at tool of Economic Development: BD Perspective. BD Research Publications Journal, Volume: Y’s Issue: 3. Page 286-296.
[10]	Damodar N. G. (1995) Basic Econometrics, Third Edition, McGraw-Hill Inc., 1995-1998, Singapore.
[11]	David A.D. and Fuller W.A.(1979), “Distribution of the Estimators for Autoregressive Time Series With A Unit Root,” Journal of American Statistical Association, Vol.74. PP. 1057-1072.
[12]	Delatte, A.L and Fouquau, Julien (2009), The Determinants of International Reserves in the Emerging Countries: a Non Linear Approach MRPA Paper No.16311.
[13]	Dooley,M.P.D.Folkerts-Landau,and P.Garber.2004. “The Revived Bretton-Woods System.” International Journal of Finance and Economics 9(4):307-18.
[14]	Disyatat, P.2001.Currency Crisis and Foreign Reserves: “A Simple Model” Working Paper, IMF.
[15]	Edwards, S.1985, “On the Interest –Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Countries.” Journal of the International Money and Finance 4(2):287-95.
[16]	Eichengroen, B. and Mathieson D.J.(2000). The Currency Composition of Foreign Exchange Reserves: Retrospect and Prospect. IMF Working Paper.
[17]	Engle R.F. and Granger C.W.T.(1987), “Co-integration and Error –Correlation: Representation Estimation and Testing,” Econometrica, Vol.65.
[18]	Flood, R and Marion, N. (2002). Holding International Reserves in an Era of High capital Mobility, IMF working Paper, 62.
[19]	Frenkel, J.1978. “The Demand for International Reserves by Developed and Less-Developed Countries.” Economica New Series, 41, 1974:14-24.
[20]	Fukuda, S. and Yoshifumikon-2007.Macroeconomic Impact of Foreign Exchange Reserves Accumulation: A theory and Some International Evidence University of Tokyo.
[21]	Gantt, R.P.(2010). Central Bank Holding of Foreign Exchange Reserves: Why Have Theory Grown So Fast? Montuna StateUniversity. Bozeman. (April).
[22]	Gosselin, M.A, and Parent, N. (2005), An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia: Bank of Canada Working Paper 2005-38, December 2005.
[23]	Green Span, A.1999. “Currency Reserves and Debt” .Remarks at the World Bank Conference on Trends in Reserves. (April).
[24]	Heller, R.H. and Khan M.S. (1978). “The Demand for International Reserves Under Fixed and Floating Exchange rate”. International Monetary Fund Staff Papers 25(4): 623-49.
[25]	Hill R.C, Griffiths W.E and Lim G.C, Principles of Econometrics,4th Edition, Title: HB139 H548 2011 330.01’5195-dc22
[26]	International Monetary Fund (IMF), (2003). “Are Foreign Exchange Reserves in Asia too High?” World Economic Outlook (September):63-77.
[27]	International Monetary Fund (IMF), International Financial Statistic Database. Available Through Ames Library Website. Accessed January28, 2005.
[28]	Landell-Mills, J.M. 1989. “The Demand for International Reserves and Their Opportunity cost”. International Monetary Fund Staff Papers 36(3):107-32.
[29]	Lane, P.R and Burke D.2001. “The Emprises of Foreign Reserves”. Open Economy Review 12(4):423-34.
[30]	Lizondo,J and mathiieson D. 1987. “The Stability of the Demand for International Reserves”. Journal of International Money and Finance.6 (3): 251-82.
[31]	Mankiw, N.G. (2001) Macroeconomics, Fifth Edition.
[32]	Mendoza, R.U.2004. “ International Reserves Holding in the Developing World: Self Insurance in a Crisis Prone era?” Emerging Market Review 5(1):61-82.
[33]	Nugee, J.1996. Foreign exchange Reserves Management. Handbooks in Central Banking. No.19. England.
[34]	Obstfeld , M Shembaugh, J.C, and Taylor A.M(2008). Financial Stability, The Trilemma, and international Reserves. NBER Working Papers (14826).1-23.
[35]	Obstfeld, M.Shembaugh, J.C, and Taylor A.M (2009).Financial Instability Swap lines in the Panic of 2008. NBER Working Paper (14826). 1-23.
[36]	Prabheesh, K P; Malathy, D and Madhumathi, R (2007) Demand for Foreign Exchange Reserves in India: A Co-integration Approach, South Asian Journal of Management, Vol.14, No.2, 2007, 36-46.
[37]	Rezaulk (2011) Maintaining International Reserves Under Three Major Political Reimes in Bangladesh. http://www.bukisa.com/articles/617887_maintaining-international-reserves-under-three-major-political-regimes-in-bangladesh.
[38]	Rodrik, D. (2006), The Social Cost of Foreign Exchange Reserves NBER Working Paper No. 11952, JEL No. F3.
[39]	Romero, A.M.(2005) 05, A. M, "Comparative Study: Factors that Affect Foreign Currency Reserves in China and India" Illinois Wesleyan University, Honors Projects. Paper 33. http://digitalcommons.iwu.edu/econ_honproj/33
[40]	Romer, D. (2006), Advanced Macroeconomics, Third Edition,© The Mcgraw-Hill companies.
[41]	Sehgal, S. and Sharma, C. (2008) A Study of Adequacy, Cost and Determinants of International Reserves in India, International Research Journal of Finance and Economics ISSN 1450-2887 Issue 20 (2008) © Euro Journals Publishing, Inc. 2008.
[42]	Snowdon B. and Vene H.R., Modern Macroeconomics, Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA.
[43]	Sodersten B. and Geoffrey R., International Economics, Third Edition, Macmillan Press Ltd, London, Great Britain.
[44]	Uddin, H.2010. An Empirical Examination of Exchange Rate between Bangladesh Taka and US Dollar after Switching to floating Syatem.Universuty of Share Job, United Arab Emirates.

Cite This Article

Plain Text BibTeX RIS

APA Style

Md. Niaz Murshed Chowdhury, Mohammed Jashim Uddin, Dr. Mohammad Saiful Islam. (2014). An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh. Journal of World Economic Research, 3(6), 72-82. https://doi.org/10.11648/j.jwer.20140306.12

Copy | Download

ACS Style

Md. Niaz Murshed Chowdhury; Mohammed Jashim Uddin; Dr. Mohammad Saiful Islam. An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh. J. World Econ. Res. 2014, 3(6), 72-82. doi: 10.11648/j.jwer.20140306.12

Copy | Download

AMA Style

Md. Niaz Murshed Chowdhury, Mohammed Jashim Uddin, Dr. Mohammad Saiful Islam. An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh. J World Econ Res. 2014;3(6):72-82. doi: 10.11648/j.jwer.20140306.12

Copy | Download

@article{10.11648/j.jwer.20140306.12,
  author = {Md. Niaz Murshed Chowdhury and Mohammed Jashim Uddin and Dr. Mohammad Saiful Islam},
  title = {An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh},
  journal = {Journal of World Economic Research},
  volume = {3},
  number = {6},
  pages = {72-82},
  doi = {10.11648/j.jwer.20140306.12},
  url = {https://doi.org/10.11648/j.jwer.20140306.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jwer.20140306.12},
  abstract = {This study undertakes an econometric analysis of the determinants of foreign exchange reserves. Yearly time series data have been used to figure out that type of relevant variables that are very much momentous for the determinants of foreign exchange reserves. This paper attempts to identify the key determinants of foreign exchange reserves in Bangladesh using Augmented Dicky Fuller (ADF) unit root test to examine the stationarity, Engle Granger residual based co-integration approach to show the co-integrating relationship among variables, and diagnostic tests for better modeling. The empirical results confirm that there exists a strong relationship among foreign exchange reserves, exchange rate, remittance, home interest rate, broad money 〖(M〗_2), UPI of export and import, and per capita GDP. The coefficients are found to change smoothly, as a function of seven threshold variables- out of nine candidates where six variables are statistically significant. Drawing inferences from these findings, it can be suggested that exchange rate, a strong remittance related policies, quality items of exports, and sustainable GDP can keep a substantial and feasible roles to make up a healthy amount of foreign exchange reserves for the host country like Bangladesh.},
 year = {2014}
}

Copy | Download

TY  - JOUR
T1  - An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh
AU  - Md. Niaz Murshed Chowdhury
AU  - Mohammed Jashim Uddin
AU  - Dr. Mohammad Saiful Islam
Y1  - 2014/11/17
PY  - 2014
N1  - https://doi.org/10.11648/j.jwer.20140306.12
DO  - 10.11648/j.jwer.20140306.12
T2  - Journal of World Economic Research
JF  - Journal of World Economic Research
JO  - Journal of World Economic Research
SP  - 72
EP  - 82
PB  - Science Publishing Group
SN  - 2328-7748
UR  - https://doi.org/10.11648/j.jwer.20140306.12
AB  - This study undertakes an econometric analysis of the determinants of foreign exchange reserves. Yearly time series data have been used to figure out that type of relevant variables that are very much momentous for the determinants of foreign exchange reserves. This paper attempts to identify the key determinants of foreign exchange reserves in Bangladesh using Augmented Dicky Fuller (ADF) unit root test to examine the stationarity, Engle Granger residual based co-integration approach to show the co-integrating relationship among variables, and diagnostic tests for better modeling. The empirical results confirm that there exists a strong relationship among foreign exchange reserves, exchange rate, remittance, home interest rate, broad money 〖(M〗_2), UPI of export and import, and per capita GDP. The coefficients are found to change smoothly, as a function of seven threshold variables- out of nine candidates where six variables are statistically significant. Drawing inferences from these findings, it can be suggested that exchange rate, a strong remittance related policies, quality items of exports, and sustainable GDP can keep a substantial and feasible roles to make up a healthy amount of foreign exchange reserves for the host country like Bangladesh.
VL  - 3
IS  - 6
ER  -

Copy | Download

Author Information

Md. Niaz Murshed Chowdhury

Department of Economics, South Dakota State University, Brookings, USA
Mohammed Jashim Uddin

Department of Economics and Banking, International Islamic University Chittagong, Chittagong, Bangladesh
Dr. Mohammad Saiful Islam

Associate Professor, Department of Economics, University of Chit

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Md. Niaz Murshed Chowdhury, Mohammed Jashim Uddin, Dr. Mohammad Saiful Islam. (2014). An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh. Journal of World Economic Research, 3(6), 72-82. https://doi.org/10.11648/j.jwer.20140306.12

Copy | Download

ACS Style

Md. Niaz Murshed Chowdhury; Mohammed Jashim Uddin; Dr. Mohammad Saiful Islam. An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh. J. World Econ. Res. 2014, 3(6), 72-82. doi: 10.11648/j.jwer.20140306.12

Copy | Download

AMA Style

Md. Niaz Murshed Chowdhury, Mohammed Jashim Uddin, Dr. Mohammad Saiful Islam. An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh. J World Econ Res. 2014;3(6):72-82. doi: 10.11648/j.jwer.20140306.12

Copy | Download

@article{10.11648/j.jwer.20140306.12,
  author = {Md. Niaz Murshed Chowdhury and Mohammed Jashim Uddin and Dr. Mohammad Saiful Islam},
  title = {An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh},
  journal = {Journal of World Economic Research},
  volume = {3},
  number = {6},
  pages = {72-82},
  doi = {10.11648/j.jwer.20140306.12},
  url = {https://doi.org/10.11648/j.jwer.20140306.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jwer.20140306.12},
  abstract = {This study undertakes an econometric analysis of the determinants of foreign exchange reserves. Yearly time series data have been used to figure out that type of relevant variables that are very much momentous for the determinants of foreign exchange reserves. This paper attempts to identify the key determinants of foreign exchange reserves in Bangladesh using Augmented Dicky Fuller (ADF) unit root test to examine the stationarity, Engle Granger residual based co-integration approach to show the co-integrating relationship among variables, and diagnostic tests for better modeling. The empirical results confirm that there exists a strong relationship among foreign exchange reserves, exchange rate, remittance, home interest rate, broad money 〖(M〗_2), UPI of export and import, and per capita GDP. The coefficients are found to change smoothly, as a function of seven threshold variables- out of nine candidates where six variables are statistically significant. Drawing inferences from these findings, it can be suggested that exchange rate, a strong remittance related policies, quality items of exports, and sustainable GDP can keep a substantial and feasible roles to make up a healthy amount of foreign exchange reserves for the host country like Bangladesh.},
 year = {2014}
}

Copy | Download

TY  - JOUR
T1  - An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh
AU  - Md. Niaz Murshed Chowdhury
AU  - Mohammed Jashim Uddin
AU  - Dr. Mohammad Saiful Islam
Y1  - 2014/11/17
PY  - 2014
N1  - https://doi.org/10.11648/j.jwer.20140306.12
DO  - 10.11648/j.jwer.20140306.12
T2  - Journal of World Economic Research
JF  - Journal of World Economic Research
JO  - Journal of World Economic Research
SP  - 72
EP  - 82
PB  - Science Publishing Group
SN  - 2328-7748
UR  - https://doi.org/10.11648/j.jwer.20140306.12
AB  - This study undertakes an econometric analysis of the determinants of foreign exchange reserves. Yearly time series data have been used to figure out that type of relevant variables that are very much momentous for the determinants of foreign exchange reserves. This paper attempts to identify the key determinants of foreign exchange reserves in Bangladesh using Augmented Dicky Fuller (ADF) unit root test to examine the stationarity, Engle Granger residual based co-integration approach to show the co-integrating relationship among variables, and diagnostic tests for better modeling. The empirical results confirm that there exists a strong relationship among foreign exchange reserves, exchange rate, remittance, home interest rate, broad money 〖(M〗_2), UPI of export and import, and per capita GDP. The coefficients are found to change smoothly, as a function of seven threshold variables- out of nine candidates where six variables are statistically significant. Drawing inferences from these findings, it can be suggested that exchange rate, a strong remittance related policies, quality items of exports, and sustainable GDP can keep a substantial and feasible roles to make up a healthy amount of foreign exchange reserves for the host country like Bangladesh.
VL  - 3
IS  - 6
ER  -

Copy | Download