Determinants of foreign exchange reserves in Brazil: An empirical investigation

Abstract

This paper examines the determinants of foreign exchange reserves of Brazil for the period 1960–2018. We use empirically robust auto‐regressive distributed lag (ARDL) bounds testing methodology to trace the determinants of foreign exchange reserves of Brazil. We incorporate other relevant variables in the model such as current account balance to GDP ratio, debt to GDP ratio, domestic credit to the private sector as a percentage of GDP, exchange rate, inflation, per capita GDP and real interest rate with foreign exchange reserves in impacting its size in Brazil. We find that long‐run relationship exists between foreign exchange reserves, current account balance to GDP ratio, debt to GDP ratio, domestic credit to the private sector as a percentage of GDP, exchange rate, inflation, per capita GDP and real interest rate. However, we find that variables under study also have unidirectional short‐run causality. Hence, the policymakers to give special attention to the fact maintain a foreign exchange reserve which is optimum keeping in mind their developmental needs.