Accumulation Of Foreign Reserves Research Articles

Foreign Reserve Management and Economic Growth in Nigeria, 1990-2018

The management, administration and utilization of Foreign External Reserves- foreign currency deposits of the apex bank (Central Banks) or other monetary or financial institutions has been a major macroeconomic challenge especially for developing economies like Nigeria. Over the past three decades, Nigeria has witnessed fluctuations in its reserve accumulation and taken numerous policy measures in the management of its external reserves. This study investigated the impact of foreign reserve accumulation and the country’s reserve management policies on its economic growth for the period 1990 to 2018. Secondary data from the United Nations Center for Trade and Development (UNCTAD), World Bank, IMF and Index Mundi Statistical Bulletin were used in the study. The data were subjected to unit root test, cointegration test and Granger Causality tests, The tests revealed that all the variables were integrated at I(1) and are cointegrated. The ECM result showed a long run relationship among the variables in our model. The OLS regression result shows an inverse and insignificant relationship between reserve accumulation and the country’s economic growth. The Reserve to GDP ratio of the country is found to be so low and significantly inversely related to the GDP per capita. Other variables in our model- MPR, BOP, FDI and Foreign Remittances were all found to have positive relationship with the MPR and Exchange rate found to be insignificant. The Granger Causality test shows that exchange rate ad foreign remittances are the dominant variables in our model. The study recommends a holistic reappraisal of the country’s exchange reserve policy, a judicious and sustainable use of foreign reserve and need to strengthen the domestic capital market. Keywords : Balance of Payment, Foreign Reserve Management, Foreign Remittances, Granger Causality. DOI : 10.7176/JESD/10-18-16 Publication date :September 30 th 2019

Does international reserve accumulation crowd out domestic private investment?

Foreign exchange reserve accumulation is one of the preferred strategies to protect against susceptibility to financial crises. At the same time, maintaining a healthy international reserve position has the potential to promote domestic investment by reducing the cost of foreign borrowing through improving international creditworthiness. However, contractionary monetary policy in the form of sterilization operations implemented as part of reserve accumulation strategy could crowd out financing for domestic investment. This study examines the relationship between foreign reserve accumulation and domestic private investment by undertaking a dynamic panel data econometric analysis covering 58 countries over the period 2000–2014. The findings suggest that reserve accumulation is positively associated with domestic private investment in the long-run.

Domestic financial instability and foreign reserves accumulation in China

AbstractUsing a time series analysis, this paper argues that domestic financial instability, which increases the potential for resident‐based capital flight from the domestic currency, provides an incentive for China to hold more foreign reserves in the short run. To measure its domestic financial conditions, we construct a monthly Chinese financial stress index, which is used as a proxy for the possibility of capital flight. The empirical results show that this index is a significant determinant of the movements of China's foreign reserves around its trend and that using M2 as a proxy for domestic financial instability as suggested by previous studies is not a valid strategy for China. It is suggested that greater attention should be given to the role of domestic financial conditions in explaining China's short‐run demand for foreign reserves.

Forecasting the Implications of Foreign Exchange Reserve Accumulation With an Agent-Based Model

We develop a stock-flow-consistent agent-based model that comprises a realistic mechanism of money creation and parametrize it to fit actually observed data. The model is used to make out-of-sample projections of broad money and credit developments under the commencement/termination of foreign reserve accumulation by the Bank of Russia. We use direct forecasts from the agent-based model as well as the two-step approach, which implies the use of artificial data to pre-train the Bayesian vector autoregression model. We conclude that the suggested approach is competitive in forecasting and yields promising results.

Born like China, growing like China

AbstractThis paper studies the effects of China's one‐child policy on saving and foreign reserve accumulation. Fertility control increases the saving rate both by altering saving decisions at the household level, and by altering the demographic composition of the population at the aggregate level. I show that demographically induced changes in saving explain the build‐up of a large foreign surplus in China. As in Song, Storesletten, and Zilibtti (2011), the model features contractual and financial market imperfections. Government‐owned firms are less productive but have full access to the credit market. Entrepreneurial firms are more productive but face credit constraints. As labour switches from less productive to more productive firms, demand for domestic bank borrowing decreases. As saving increases while demand for loans decreases, domestic savings are invested abroad, generating a foreign surplus. The model predicts that China's foreign reserve accumulation will soon begin to slow down in response to recent relaxation of the one‐child policy.

The role of international reserves holding in buffering external shocks

ABSTRACTAn extended literature analyses the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This article devotes more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of nine emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995–2003 and 2004–2013. We implement threshold VAR model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.

Do Sterilized Foreign Exchange Interventions Create Money?

When a central bank accumulates foreign reserves, there are two possible ways of balance of payments adjustment: (1) decreasing commercial banks’ net foreign assets and, (2) decreasing the non-banking sector’s net foreign assets and/or increasing the current account surplus. In the latter case, money is created. It does not matter whether the central bank sterilizes the bank reserves that it supplied to the money market and prevents the interest rate change – money will be created anyway (although sterilization may prevent further money creation through credit extension). Our empirical analysis shows that for emerging markets the type (2) adjustment is more common than type (1). Therefore, the accumulation of foreign reserves is likely to create money even when sterilized (i.e. it does not lead to lower money market interest rates).

Money power of Capital and Production of ‘New State Spaces’: A View from the Global South

ABSTRACTAn array of innovative financial and monetary institutional and policy initiatives recently emerged across the Global South at various spatial scales: (1) the deployment of national ‘self-insurance’ strategies such as large foreign reserve accumulation, different forms of capital controls, and currency market interventions; (2) the multiplication of bilateral, sub-regional, and regional financial and monetary mechanisms, including currency swaps and reserve-pooling arrangements, credit lines, bilateral aid, and development finance; and (3) a growing participation and assertiveness in multilateral financial arrangements. After critically reviewing the existing literatures – the international political economy (IPE) of ‘policy space’ and the IPE of ‘financial statecraft’ – the paper deploys a ‘scalar-relational’ critical IPE approach and interprets these policy initiatives in terms of a crisis-driven production of ‘new state spaces’ across the Global South, in the context of the current period of credit-led capital accumulation. The paper argues that this process has been characterised by the contradictory extension, intensification and growing complexity of the tasks taken on by the capitalist state at various scale levels, resulting in the increasing entanglement of state power in the nested hierarchy of monetary relations, from the global scale to bodies and subjectivities.

A Growth Perspective on Foreign Reserve Accumulation

Based on a dynamic open-economy macroeconomic model, this paper aims at understanding the contribution of domestic financial underdevelopment to foreign reserve accumulation in some emerging market economies, especially in China. It is argued that foreign reserve accumulation is part and parcel of a growth strategy based on strong capital investment in a financially constrained economy. It is further proved using a Ramsey problem that purchasing international reserves is a welfare-improving policy in terms of production efficiency gains if it is jointly used with capital controls. In fact, when domestic firms are occasionally credit-constrained and they do not have a direct access to international financial market, they need domestic saving instruments to increase their retained earnings so that they can sufficiently invest in capital. The central bank plays the role of financial intermediary and provides domestic firms with liquid public bonds, thus relaxing domestic financial constraints. The proceeds of domestic public bonds are invested abroad due to the limited scope of domestic financial market and a depressed domestic interest rate, leading to foreign reserve stockpiling. The speed of foreign reserve accumulation would slow down once the economic growth rate decelerates and the domestic financial market develops.

Limits of Monetary Policy Autonomy of East Asian Central Banks

Abstract East Asian central banks have accumulated large stocks of foreign reserves over the last two decades. Important driving forces were protracted capital inflows that triggered interventions in the foreign exchange market to soften appreciation pressures. The accumulation of foreign reserves created surplus liquidity, which can lead to undue monetary easing and risks to price and financial stability. This resulted in extensive liquidity absorbing measures. Central bank losses will be more likely, if the interest rate differential to the anchor currency country is positive and the exchange rate appreciates. Given that the central banks care about these losses, monetary policy autonomy is limited. JEL Classification: E52, E58, F31

Macroeconomic impacts of China’s foreign exchange reserve accumulation: a vector autoregression analysis using pure-sign-restriction approach

ABSTRACTThis study employs pure-sign-restriction approach analysing the macroeconomic impacts of foreign reserve accumulation and discusses the foreign exchange sterilization behaviour of the People’s Bank of China (PBoC). Sign restriction analysis shows that the effects of reserve accumulation shock are initially ambiguous on all variables, but later a positive influence only on base money can be observed. With regard to sterilization intervention, the effect is significant even though it degrades gradually over time. In China, the monetary authority actively undertakes sterilization intervention in order to remove the influence of passive release of base money caused by foreign reserve accumulation.

A Welfare Analysis of 'New Mercantilist' Foreign Reserve Accumulation

Contrary to traditional neoclassical growth models, recent decades have seen a number of developing economies running sizable current account surpluses. In response to "new mercantilist" explanations of this phenomenon that relate holdings of foreign assets to higher levels of economic growth, this paper presents a theoretical model of a small open developing economy that permits a welfare analysis of mercantilist policies and importantly answers the question of whether mercantilist motives alone can explain the recent high levels of observed foreign asset holdings. Using a calibration to match the characteristics of China, the model predicts that while such policies may lead to significant welfare gains, consumers' desires to smooth consumption generally preclude a positive current account balance under most parameterizations. Deliberate foreign asset accumulation may be welfare reducing or mercantilist motives may provide only one component of a fuller explanation.

Undervaluation through foreign reserve accumulation: Static losses, dynamic gains,

This paper analyzes foreign reserve accumulation as a second-best policy in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. Under closed capital accounts, reserve accumulation requires an increase in net exports, which reduces the domestic supply of tradable goods, raises their relative price in terms of non-tradable goods – i.e. undervalues the real exchange rate – and stimulates the production of tradable goods. The cost of such a policy is to reduce domestic tradable absorption. However, since the tradable sector generates learning-by-investing externalities, it leads to dynamic gains. Reserve accumulation always increases growth in our framework, but the net welfare effects depend on the balance between the static losses from lower tradable absorption and the dynamic gains from higher growth. We capture this trade-off in a simple analytic formula and depict it in an intuitive graph. We also discuss alternative policy options to reserve accumulation that serve to internalize learning-by-investing externalities.

Insuring Against Past Perils: The Politics of Post-Currency Crisis Foreign Exchange Reserve Accumulation

In the aftermath of financial crises, governments can use economic policy to minimize the risk of future recurrence. Yet not all do so. To explain this divergence in responses I develop a theory of economic policy choice after financial crises. I argue that past financial crises provide information to future governments about the political costs of financial crises. This subsequently informs the need to use economic policy to insure against such crises. Focusing on the accumulation of foreign exchange reserves after currency crises, I find that when past currency crises led to political changes future governments accumulate higher levels of reserves to prevent another crisis from occurring. This effect is stronger when political change occurred in situations where governments would not expect to be held accountable, and when reserve sales were shown to be effective in preventing political change. The theory and empirical results provide an answer as to why countries experiencing a similar form of financial crisis can, nevertheless, vary in their attempts to prevent future recurrence.

Managing Capital Flows in Asia: An Overview of Key Issues

Global capital flows into emerging markets, including those in Asia, continue to be volatile. These capital flows generate both benefits and costs. The latter are associated with episodes of currency and banking crises like the 1997 Asian financial crisis and the 2008 global financial and economic crisis. Policy responses can be implemented to minimize the costs. At the same time, policy responses should vary depending on whether “pull” factors or “push” factors dominate the capital flows. Data show that the main impact of capital flows on economies of East Asia is reflected in real effective exchange rates, equity prices, and accumulation of foreign exchange reserves. If “pull” factors are dominant, policy makers should allow real exchange rates to appreciate in the long-term. Three broad categories of macroeconomic measures are available to countries facing surges of capital inflows, if they are not willing to allow the nominal exchange rate to appreciate: (i) sterilized intervention, (ii) greater exchange rate flexibility, and (iii) fiscal tightening (preferably through expenditure cuts). However, all of them have major drawbacks. Instead, capital controls or, more generally, macroprudential policy can be considered. Other policy recommendations include measures to encourage foreign direct investment, as this type of capital flow is more stable and beneficial; exchange rate coordination to reduce the adverse impacts of currency appreciation on the global competitiveness of domestic firms; and regional financial cooperation, particularly in the development of local bond markets. Recent data show the adverse impact of Quantitative Easing tapering on Asian economies. This is verified by econometric results showing the strong linkages between the United States bond markets and those in Asia. These findings enhance the role of macroprudential policy, which can be implemented in the context of regional cooperation in order to reduce negative spillovers across economies in Asia.

Investment, asset market, and the relative unit labor cost in Mexico

The paper estimates equations for the Mexican/US manufacturing relative unit labor cost (RULC), and finds significant effects from asset market variables like interest rate differentials, foreign reserve accumulation, and international capital flows. The equations are motivated by a simple decomposition that reveals the roles played by relative manufacturing prices and real product wages—and hence the nominal exchange rate—in the upward trend of RULC. The paper follows to estimate equations for aggregate private investment in Mexico, finding a negative RULC effect that agrees with the recent literature on the real exchange rate’s profitability (or development) channel. All the estimations focus on long-run effects, applying the bounds testing approach to quarterly data from 1988 to 2013. The results imply that both the repeated surges in capital inflows and the disinflationary stance of monetary policy in Mexico contributed to the upward trend in RULC, which affected the country’s economic growth negatively by its depressing effect on investment.

Regional Financial Arrangement in East Asia: Policy Proposal for Strengthening the Chiang Mai Initiative Multilateralization

Since the Asian financial crisis of 1997-98, the East Asian countries have made efforts to guard against the crisis not only by being self-insured through the accumulation of foreign reserves but also by establishing a bilateral or regional financial safety net through the pooling of reserves. Holding ample amount of foreign reserves has proven itself to be useful but it comes with a high price tag. Moreover, in spite of noticeable achievements in recent years, the regional financial arrangement, namely the CMIM framework, had not been activated during the global financial crisis in 2007-08. Ironically, the bilateral currency swaps with the US Federal Reserve Bank played a pivotal role at that time in addressing some Asian countries’ liquidity shortages.The crisis in 2007-08 has provoked a recurring discussion about the necessity of transforming the international monetary system and enhancing the alternative or complementary insurance mechanism of regional financial arrangements to fend off shocks. In the paper, we propose two ways to strengthen a regional financial arrangement in East Asia to make a practical contribution to the global architecture reform agenda and to build a resilient economy: (i) establishing a currency arrangement under CMIM framework to increase the usage of local currencies; and (ii) creating a cooperative framework between the AMRO and the IMF in the area of surveillance.

INTRODUCTION TO THE SPECIAL ISSUE ON GROWTH, OPTIMAL FISCAL AND MONETARY POLICY, AND FINANCIAL FRICTIONS

Since 1997, the Department of Economics of the University of Crete has organized an annual international conference on macroeconomic analysis and international finance. The articles included in this special issue are refereed versions of papers presented at the 17th International Conference on Macroeconomic Analysis and International Finance held at the University Campus, Rethymno, 30 May–1 June 2013, and submitted to Macroeconomic Dynamics in an open call for papers. The central theme of this Special Issue is Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions. The topics discussed in this issue are endogenous growth and public investment and taxation; optimal inflation and fiscal and monetary policy; foreign reserve accumulation and China's exchange rate policy; and liquidity shocks and financial frictions. We begin the Special Issue with an overview of these papers.

A GROWTH PERSPECTIVE ON FOREIGN RESERVE ACCUMULATION

Based on a dynamic open-economy macroeconomic model, this paper analyzes the motive for foreign reserve accumulation in fast-growing emerging economies. The demand for foreign reserves stems from the interaction between productivity growth and underdevelopment of the domestic financial market. As domestic firms are credit-constrained, domestic saving instruments are necessary to increase their retained earnings in order to invest in capital. The central bank plays the role of a financial intermediary and provides liquid public bonds while investing the bond proceeds abroad in the form of foreign reserves. Foreign reserve accumulation is thus part of a catching-up strategy in an economy facing financial frictions. During economic transition, foreign reserve accumulation is proved to be welfare-improving as long as private capital flows are controlled. This joint strategy enables the central bank to channel sufficient external funding to the domestic economy while keeping domestic interest rates under control to cope with positive productivity shocks.

Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis

A fivefold increase in central bank foreign reserves across the globe over the past fifteen years has prompted the question of whether this constitutes a new form of mercantilism. According to this view, countries accumulate foreign reserves in order to support export promotion by influencing exchange rates and/or to signal relative economic strength as a modern version of bullionism. Using a unique dataset on daily foreign exchange intervention, this paper investigates the mercantilist motive hypothesis for the case of Brazil over the period 2009-2012. The findings support reserve accumulation as a by product of successful central bank intervention in the Brazilian foreign exchange market. The results also indicate regional currency intervention spillovers to Brazil's neighbouring countries, including on their foreign reserve build-ups.