Measuring non-linear effects of exchange rate movements on reserve holdings

Abstract

Due to flaws in fiscal and financial structures, currency rate changes have detrimental effects on emerging economies. The lack of financial protection tools and insufficient levels of financial market development leaves African nations exposed to such harmful consequences of rates of exchange volatility. This study attempted to investigate the impact of exchange rate movements on the volume of reserves held by African countries struggling to maintain enough earnings to warrant floating their currency against the dollar. The non-linear autoregressive distributed lag (NARDL) of Shin et al. (2014) filters movements in exchange rates into the negative and positive partial sum, respectively. We found that devaluation weakens reserve volume in Morocco, Namibia, Nigeria, South Africa, Zambia, Kenya, Malawi and Mauritius. Exchange rate appreciation significantly decreases Ghana, Kenya, South Africa, and Mauritius reserves. The magnitude of exchange rate devaluation, 0.94, 0.85, and 0.91 in Nigeria, Malawi, and Zambia, as reported by the positive cumulative sum of the changes in the exchange rate, exceeded the magnitude of appreciation, 0.12, 0.10, and 0.17, respectively. Accordingly, the effects of exchange rates on reserves in Ghana, Malawi, Morocco, Nigeria, Namibia, and Zambia are asymmetric, while the impact in Egypt, Kenya, South Africa, and Mauritius is symmetric.