Demand for Foreign Exchange Reserves in India: A Co-integration Approach

Prabheesh, K P and Malathy, D and Madhumathi, R (2007): Demand for Foreign Exchange Reserves in India: A Co-integration Approach. Published in: South Asian Journal of Management , Vol. 14, No. 2 : pp. 36-46.

Abstract

Using cointegraion and vector error correction approach, we estimate India’s demand for foreign exchange reserves over the period 1983:1-2005:1. Our results establish that the ratio imports to GDP, the ratio of broad money to GDP,exchange rate flexibility and interest rate differential determine India’s long-run reserves demand function. Our empirical results show that reserve accumulation in India is highly sensitive to capital account vulnerability and less sensitive to its opportunity cost. The speed of adjustment coefficient of vector error correction model suggests that Reserve Bank of India has to engage in more active reserve management practices.

• Item Type: MPRA Paper
• Language: English
• Keywords: foreign exchange reserves; capital account vulnerability; current account vulnerability; cointegration
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

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