Abstract
ABSTRACT This study investigated the impact of economic growth on Brazilian international reserves holdings in the context of Error Correction Mechanism using data over the 1980-2014 period. The results reveal that economic growth is highly significant. From the estimation of our model, we argue that economic growth and international reserves have positive long run relationship. Error correction estimates validated our model for error correction term is negative and statistically significant. Besides, our model suggested that economic growth has short run relationship too. The speed of adjustment is more than 40% which indicated that error correction term corrects previous year disequilibrium at the rate of 40.4%.
Highlights
International reserves or foreign exchange reserves are a country’s external assets that include gold, Special Drawing Rights (SDRs), foreign currency deposits and bonds held by central banks and monetary authorities
We provide empirical findings on the issue of influencing international reserves by a macroeconomic variable such as economic growth in case of Brazilian economy by employing error correction mechanism
We demonstrate that economic growth and international reserves have positive long run relationship
Summary
International reserves or foreign exchange reserves are a country’s external assets that include gold, Special Drawing Rights (SDRs), foreign currency deposits and bonds held by central banks and monetary authorities. According to International Monetary Fund, international reserves are “Those external assets that are readily available to and controlled by the monetary authorities for meeting balance of payments financing needs, for intervention in exchange rate markets to affect the currency exchange rate, and for other related purposes” (IMF’s BPM6, 2014).The top ten holders of international reserves account for nearly two-thirds of the world’s total international reserves. With USD 3.86 trillion at the end of 2015, tops the list. Ten years ago it had only USD 822 billion. There is an increasing debate about the need to have large stocks of foreign exchange reserves
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