Foreign Reserves Research Articles

Protecting Pegged Currency Markets from Speculative Investors

We consider a stochastic game between a trader and a central bank in a target zone market with a lower currency peg. This currency peg is maintained by the central bank through the generation of permanent price impact, thereby aggregating an ever increasing risky position in foreign reserves. We describe this situation mathematically by means of two coupled singular control problems, where the common singularity arises from a local time along a random curve. Our first result identifies a certain local time as that central bank strategy for which this risk position is minimized. We then consider the worst-case situation the central bank may face by identifying that strategy of the strategic investor that maximizes the expected inventory of the central bank under a cost criterion, thus establishing a Stackelberg equilibrium in our model.

Does Monetary Policy Stimulates Macroeconomic Performance during Economic Downturn in Nigeria?

This study investigated the relationship between monetary policy and macroeconomic performance in Nigeria during 1981-2018. The stochastic properties of the time series data were examined using both conventional and unit root tests with structural breaks to account for shift dummy in the series. Their results indicates that the series are combination of both I(0) and I(1) in the same specification which prompted the use of ARDL. The results revealed that in the short run, lag value of inflation rate, exchange rate appreciation and unexpected appreciation (i.e., shift_dummy) could reduce inflation rate while lower MPR and high volume of money in circulation could stimulate inflation rate. Also, lag value of unemployment rate, high MPR and exchange rate depreciation significantly stimulate unemployment rate while unexpected appreciation reduce it. Low MPR and exchange rate depreciation could stimulate GDP growth rate while unexpected appreciation in exchange rate retards GDP growth in Nigeria. In the long run, inflation rate is constrained by exchange rate appreciation while depreciation promotes growth but stimulate unemployment rate in Nigeria. Also, MS2 stimulates inflation and unemployment rate but produce negative effect on GDP growth in Nigeria. Based on the results, the policy implications were drawn for Nigeria. Monetary authority should use its policy instruments to minimize pressures on the exchange rate, inflation and foreign reserves. This could be done by design policy measures that promote the value of Naira and check exchange rate fluctuation. Also, monetary policy instruments must be as supportive so as to ensure price stability, reduce unemployment rate and consequently brings about economic growth.

Foreign Exchange Dynamics and Reserve Accumulation under Capital Inflows

When a currency’s appreciation expectation cannot be offset by lower interest rates which have fallen to the zero lower bound, the monetary authority needs to intervene to prevent currency appreciation due to capital inflows and resulting in foreign reserve accumulation. Based on a standard flexible-price monetary framework, this paper extends a target-zone model in which the intervention policy is incorporated by specifying the asymmetric mean-reverting fundamental dynamics with the smooth-pasting condition at a moving boundary. The solution of the model shows that the exchange rate dynamics is more sensitive to the change in the fundamental when the domestic interest rate is constrained at zero, suggesting more intensive interventions are required to counteract currency appreciation pressure. The empirical results using market data during January 2015 – February 2020 demonstrate that the model can describe the dynamics of the Swiss franc exchange rate following the mean-reverting square-root process. The accumulation of foreign reserves through interventions is negatively co-integrated with the exchange rate volatility and the value of the mean level of the Swiss franc exchange rate in the dynamics, to some extent indicating a reasonably high degree of effectiveness of the Swiss National Bank’s interventions.

Empirical Analysis of Exchange Rate Fluctuationsand Gross Fixed CapitalFormation in Nigeria

This study investigated the effect of exchange rate Volatility on gross fixed capital formation. Mundell-Fleming Model is used as a theoretical framework for establishing relationship between relevant variables. The erratic fluctuation in exchange rates referred to as exchange rate volatility could be described as periods of domestic currency appreciation or depreciation. Exchange rate has considerable attention in terms of its influence on gross fixed capital formation. The study covered the period between 1980-2016 and Ordinary Least Square (OLS) techniques was used in estimating the relationship between the variables included in the specified regression model. The data was collected from Central Bank of Nigeria Statistical Bulletin and the World Bank Indicators for Nigeria. The major finding of this study shows that the Exchange rates (EXCHR) has a positive and significant linear relationship with gross fixed capital formation. This implies that a unit increase in naira gain against other currencies will result to 0.961 increases in GFCF. The result equally shows that the Degree of trade openness (TOP) has negative and significant relationship with Gross fixed capital formation .This implies that a unit increase in trade openness will result to a 1.613 unit decline in GFCF. The result of Inflation rate (INFL) has negative and significant relationship with gross fixed capital formation. This implies that a unit increase in inflation will result to a 0.558 unit decline in GFCF. It implies that Stringent trade measures should be adopted to checkmate inflation mostly the imported inflation through foreign trade. The study therefore recommends that monetary authorities should adopt measures that will strengthen the naira against other currencies. Also that Stringent trade measures should be adopted to protect local industries and reduce the depletion of our foreign reserves through excessive importation. This can be achieved through high tariffs, quotas and outright ban on some certain goods and services.

The impact of economic policy instruments on the conditions of sustainable economic growth

Given the low rates of economic growth in Russia and the aggravation of the geopolitical situation, the question of the prospects for its stimulation with fiscal and monetary policy tools is of particular relevance. The main priority of the economic policy is to ensure financial stability and prevent destabilization, taking into account the volatility of hydrocarbons prices and the geopolitical tensions. The article uses dialectical materialistic and concrete historical methods to protect that the current economic policies should be focused on sustainable economic growth. It is necessary to form a new strategy of monetary regulation and budget policy that would contribute to the sustainable development of the Russian economy and ensure the economic security of the country. In the perspective of maintaining sustainable economic growth, it is important to solve the problem of equitable distribution, expressed in a strong stratification of society and the violation of social stability, the implementation of economic policy at the level of macroeconomic planning; it is advisable for the Central Bank to follow the link between the possible range of inflation and economic growth; to stimulate consumer and investment demand by reducing interest rates, to form money supply not due to linking gold and foreign currency reserves, but under the issue of securities, to increase budget expenditures and increase public debt for the sake of investment in education and health care.

Dissecting the Linkages between Variations in Crude Oil Price and Selected Macroeconomic Variables in Nigeria

This study examines the dependency between changes in crude oil price and 15 Nigerian macroeconomic variables. We employ a monthly time series data covering the period from January 2000 to December 2019 and recently refined feasible generalized least square estimator (FGLS) which has the advantage of fixing data problems such as persistency, endogeneity, and heteroscedasticity. The findings of the study shows that oil price changes could substantially predict 10 out of 15 dependent macroeconomic variables, namely all share index, exchange rate, interest rate, inflation, GDP, market capitalization, market capitalization/GDP ratio, net foreign asset, quasi money, and total foreign reserve. 7 out of these 10 significant macroeconomic variables respond to oil price change when the predicting horizon was varied for 4 different periods. However, oil did not substantially predict GDP in the out - of - sample forecast, but did in 3/4 of the in-sample forecast. Also, the null hypothesis of no predictability applies to the remaining 5 macroeconomic variables, namely, money supply 1, money supply 2, net domestic credit, currency in circulation and demand deposit. We recommend the need for consistent monitoring of oil price behavior by regulators so as to counteract its adverse effects by the use of monetary policy and to also intensify the diversification process of other sectors of the economy.

Optimal Foreign Reserves and Central Bank Policy Under Financial Stress

We study the interaction between optimal foreign reserves accumulation and central bank international liquidity provision in a small open economy under financial stress. Firms and households finance investment and consumption by borrowing from domestic financial intermediaries (banks), which in turn borrow from abroad. Binding financial constraints can cause the domestic rate of interest to rise above the world rate and the real exchange rate to depreciate, leading to inefficiently low investment and consumption. A role then emerges for a central bank that accumulates reserves in order to provide liquidity if financial frictions bind. The optimal level of international reserves in this context depends, among other variables, on the term premium, the depth of financial markets, ex ante financial uncertainty and the precise way the central bank intervenes. The model is consistent with both the increase in international reserves observed during the period 2004-2008 and with policy intervention after the Lehman bankruptcy. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Impact of External Debt on Nigeria’s Foreign Reserve Portfolios

This study examines the impact of external debt and external debt servicing on the international reserves of Nigeria. The theoretical underpinning of the study was anchored on dual gap theory and the self-insurance theory of external reserves. The after effect research design was adopted to examine the components of the study in retrospect. Historical data spanning 1981 to 2018 was collated from the World Development indicators and analyzed using the error correction mechanism as the unit of analyses and estimated employing the least square technique. The empirical findings indicate that external debt stock exert a negative and statistically significant impact on Nigeria’s foreign exchange reserve portfolios. It further emerged that external debt service payments exert a positive but statistically insignificant impact on the international reserves of Nigeria. The study concludes that external debt stock and external debt service payments has no significant impact on the international reserve portfolios of Nigeria. The study recommends that, the fiscal managers of Nigeria should exercise cushion in external borrowing in order to ensure that concomitant external debt service payments does not deplete the international reserves of the country.

The Reliance of the Saudi Economy and Adequacy of its Foreign Reserves with Reference to Oil Price Volatility: An Overview

This paper is providing an important overview of the reliance of Saudi Arabia’s economy on oil export revenues. Besides, it is exploring how oil production as natural resources play a significant role in the Saudi Arabian economy. Moreover, it also highlights why the Saudi government pegged its currency to the US Dollar to avoid currency fluctuation and eliminate uncertainties in international transactions if oil prices highly fluctuated. As oil as a commodity is priced in the US dollar, this paper showed how oil price volatility has an impact on both the world economy and Saudi Arabia in particular. The role of oil revenue and accumulation of Saudi foreign assets will be explained, and its economic significance highlighted as well. The oil revenues served in the country’s first five decades to pay for government spending on much-needed infrastructure, but it was evident that the economy at some point had to diversify to avoid the deficit in the government budget when oil revenues shrink. The rationale for the establishment of the Saudi Arabian Monetary Authority (SAMA) was to effectively manage two things: the flow of current account surpluses and the foreign currency reserve. Finally, SAMA is the central bank in Saudi Arabia, and it has continued to play an essential role in the Saudi economy, especially in terms of managing foreign reserves.

India

India has been among the world’s fastest-growing economies in recent years, lifting millions out of poverty. However, growth slowed to a six-year low in the first half of 2019, with both consumption and investment decelerating owing to weak, especially rural, income growth, stresses in the non-bank financial sector, and corporate and environmental regulatory uncertainty. On the external sector, following a rise in vulnerabilities in 2018, stability has returned, anchored by high foreign reserve buffers and a modest current account deficit.

Empirics for Marginal Product of Capital

We characterize the marginal product of capital on a cross-section data of 88 economies over 1980–2013. The marginal product of capital is increasing on savings misallocation rate, measuring the fraction of savings unconverted into investment, on productivity growth and on financial openness. One country with a higher marginal product of capital makes more domestic investment, receives more foreign direct investment (FDI) and equities inflows, but accumulates more foreign debts and reserves. Moreover, it also has a higher financial development level.

Macroeconomic Impact of Agricultural Commodity Price Volatility in Nigeria

Introduction: The Nigerian economy has remained consistently heavily dependent on earnings from commodity exports which constitute over 95% external earning and 85% of budgetary and fiscal financing. Agricultural commodity exports have witnessed a significant price swings in the international market in the past few decades resulting in food price hike and macroeconomic distortions in economies heavily dependent on food imports. Methods and Materials: The study assesses the macreoconomic impact of agricultural commodity price volatility in Nigeria from 1970-2017 using Autoregressive Distributive Lag (ARDL) cointegration and Impulse-Response Function (IRF) analysis. The study adopted an atheoretical statistics to ascertain the evidence of swings in macroeconomic aggregates. Results: There was evidence of persistent fluctuations in the macroeconomic variables observed, implying that external price shocks exert a significant impact on the macroeconomic management, since bulk of national budgetary and fiscal financing is from commodity exports. Conclusion: The study found that volatile agricultural prices were responsible for a meager 2% of macroeconomic fluctuations. The empirical evidence corroborates the statistics showing that the share of agriculture in primary commodity exports has consistently remained less than 3% since the advent of crude oil. Furthermore, the study found that the swings in agricultural prices impacts foreign reserves and inflation more significantly and earlier in the time horizons than other macroeconomic aggregates.

Testing the \u2018Fear of Floating\u2019 Hypothesis: A Statistical Analysis for Eight African Countries

This paper revisits the fear of floating hypotheses for eight African countries from the collapse of the Bretton Woods fixed exchange rate system in the early 1970s up until December 2017. This long period of calendar time allows us to extend previous studies by examining the fear of floating hypotheses in two distinct ways. First, we look at a set of descriptive statistics to compare the degree of exchange rate flexibility under alternative de jure exchange rate regimes. We find no statistical difference between exchange volatility between declared floaters and fixers, but greater reserve volatility between the floaters, which is suggestive of fear of floating. Second, we use a non-linear, threshold VAR model, estimated for each country, to test for a relationship between exchange rate changes and reserve changes. The results suggest some evidence of a fear of floating for countries which have declared a de jure floating regime, with the regime-dependent impulse responses indicating that exchange rate appreciation due to positive reserve shocks is more prevalent in the high reserve regimes, indicative that level of foreign reserves available are important for their exchange rate policies. In general, although the countries with de jure floating regimes have a lower threshold than those with pegged regimes, reserves adjust by more than the exchange rates showing a fear of floating.

Financial literacy in Ukraine: from micro to macro level

Low financial literacy of population hinders the financial market development, limits the possibilities of using the savings for investing and creating the additional capital in the country. At the state level it results in inflation, the budget deficit creation, a decrease in country’s gold and foreign exchange reserves, an increase in internal and external government debt. The article analyzes the approaches to understanding the concept of financial literacy, tools for its measuring and comparing at micro and macro levels, dynamics of savings and gold and foreign currency reserves, peculiarities of financial literacy through the analysis of dynamics and structure of revenues and expenditures of the government budget and the population of Ukraine. Factors influencing the financial literacy of the population have been systematized. The findings give an idea of creating the optimal managerial influence based on the estimation of financial literacy of the Ukrainian population with the help of specific statistical indicators to expand the possibilities of such influence and to regulate the economic processes to achieve the financial stability of the state and the population. The study showed low financial literacy at both population and state levels. However, at the micro level, creating the credit relations, as well as income, expenses, and savings is more effective than at the macro level.

Exchange Rate Policies at the Zero Lower Bound

Abstract We study the problem of a monetary authority pursuing an exchange rate policy that is inconsistent with interest rate parity because of a binding zero lower bound constraint. The resulting violation in interest rate parity generates an inflow of capital that the monetary authority needs to absorb by accumulating foreign reserves. We show that these interventions by the monetary authority are costly, and we derive a simple measure of these costs: they are proportional to deviations from the covered interest parity (CIP) condition and the amount of accumulated foreign reserves. Our framework can account for the recent experiences of “safe-haven” currencies and the sign of their observed deviations from CIP.

Monetary trilemma, dilemma, or something in between?

AbstractThis paper revisits the monetary “trilemma” versus “dilemma” debate by examining empirically interest‐rate policy independence for a large sample of both advanced and developing countries over the period 1973–2014. We broadly concur with the growing body of literature that suggests that the trilemma still holds, emphasizing the important insulating effects afforded by exchange‐rate flexibility. However, as with Han and Wei (2018), we also document the existence of an asymmetric pattern or 2.5‐lemma between the trilemma and dilemma; though, in contrast to them, we find there seems to be evidence of a “fear of capital reversal” rather than a “fear of appreciation.” We further find that holding higher levels of foreign reserves may help countries regain a degree of monetary‐policy autonomy.

Determining the efficiency of rice production in the Kadawa rice cluster of Kano State, Nigeria

In an efforts to increase the production of rice for food security and reduced deflation of foreign reserves, the Nigerian government eases access to fertilizer, extension services and improved rice seed. Therefore, the paper examines the effect of access to fertilizer and extension services infrastructures and improved rice seed on the productivity of rice farmers as well as identify their level productivity in the Kadawa rice cluster. A five Likert structured questionnaire randomly administered to a sample of 80 rice farmers in the 2018 crop season. The Cobb-Douglas stochastic frontier production model was used to analyze the data. The descriptive result shows that males (83.3%) dominated rice farming. The economically active age group are 53%, the married group are 65.2%, those with at least six years of experience in rice farming are 74.2%, and 22.7% attained tertiary education. Further, the stochastic frontier result shows that improve rice seed and extension services positively affect rice production, while fertilizer negatively affects rice production. Further, the result shows that years of experience in rice farming reduces technical inefficiency. While qualification, age, and marital status reduce rice production. Therefore, the study recommends the provision of educational facilities for quality education. Expanding extension workers’ services to farmers, since one visit per crop season seems to be not enough to offer the necessary information to farmers. Finally, to attract experienced, educated young married farmers to partake in rice cultivation in the study area.

Reserve Adequacies and the Determinants of Foreign Exchange Reserves – Empirical Analysis through the Vector Error Correction Model: The Case of Lebanon

Abstract Investigating the causes and motives for reserves’ accumulation in a highly dollarized small open economy such as that of Lebanon is of extreme importance, especially since fluctuations in foreign reserves have been demonstrated to be a leading cause of economic and financial instability. For an emerging economy such as that of Lebanon, which is subject to internal and external shocks, the accumulation and holding of reserves signal, among other things, credibility and financial strength. Therefore, identifying the factors that determine the level of reserves in the long and short term is crucial for the stability of the entire economy. For an in-depth understanding of those factors, this study employs the vector error correction model (VECM), which helps distinguish between short- and long-term effects. The results indicate that currency substitution has the most significant impact on reserves in the short and long terms, while the trade balance and the real effective exchange rate have substantial effects but only in the long terms. The study also reveals that the reserves held by the central bank fulfil all the reserves’ adequacy criteria and are in alignment with the reserves’ adequacy ratios.

Impact of Political Stability and Managerial Ownership on Firm’s Profitability

The vibrant business sector is a dynamic segment for Pakistan’s economic development because it offers employment to a larger population of skilled and unskilled labour; creates foreign reserves through exports; and also satisfies local demand for the products. Moreover, the listed companies perform a significant function in the growth of an economy, however, on pragmatic grounds, access to capital is evidenced as a matter of grave concern for the business sector in Pakistan. Moreover, it has been observed that in order to reduce the firms’ agency costs, managerial ownership is utilized. Hence, in this essence, this research investigates the relationship of political stability, managerial ownership, dividends, sales, and total assets with the firm’s profitability in Pakistan during 2013-2017. The findings depict that the variables of political stability, total assets, dividends, and sales, positively and significantly affect the firm’s profitability, while, managerial ownership is insignificantly associated with profitability.

Democratic Republic of Sao Tome and Principe

São Tomé and Príncipe is a fragile, small island-state, with limited resources and capacity. The last Extended Credit Facility (ECF) arrangement expired at end-2018 having gone off-track amid parliamentary elections, power outages, internal and external imbalances, and high debt vulnerability. Growth slowed, inflation rose, the fiscal position deteriorated, and foreign reserves declined sharply in 2018, while some critical structural reforms were delayed. Higher and more inclusive growth is needed to reduce poverty and unemployment, particularly among the large youth population.