Stock Of Foreign Reserves Research Articles

Linkages between External Reserves and Economic Performance in Nigeria, 1981-2018: Bounds Test and ARDL Approaches

Aims: This study seeks to explore a two-way relationship between Nigeria’s economic performance, measured by the GDP, and her stock of foreign reserves over time.
 Study Design: It uses secondary data - documented time series of Nigeria’s gross domestic product (GDP) and foreign exchange reserves (FER) – collected from various volumes of the Central Bank of Nigeria (CBN) Statistical Bulletin. The annual time series data cover a period of 38 years, from 1981-2018.
 Methodology: The time series properties of the variables were verified using the Augmented Dickey-Fuller (ADF) unit roots’ test procedure. Also, the Bounds test technique was used to test for cointegration while the autoregressive distributed-lag (ARDL) and error correction models were estimated to analyze short- and long-run relationships between the variables. Relevant diagnostic tests were carried out to validate the resultant model estimates.
 Results: Results of unit roots’ test reveal both GDP and foreign reserves as I(1) series. Bounds test for the GDP model revealed an observed F-statistic (.421) that is less than the critical lower bound F-statistic (4.94) at P=.05 and cointegrating relationship was not confirmed. However, Bounds test for the foreign reserves revealed an observed F-statistic (6.445) lager than the critical upper bound F-statistic (5.73) at P=.05 and cointegration was established leading to specification of a long-run error correction model (ECM). Result of ARDL model estimation shows that only one-year-lag of GDP was significant (P=.05) and positive in explaining variations in the current GDP. Previous year’s values of both GDP and foreign reserves have positive influence on the long-run foreign exchange with over 81.8% explanatory power. The adjustment coefficient of the error correction equation is highly significant (P=.001) with the desired negative sign, implying that previous periods’ errors are correctable by adjustments in the subsequent periods, and convergence is attainable. Granger-Causality test result revealed a unidirectional causality that runs from GDP to the external reserves.
 Conclusion: The study establishes a long-run relationship between stock of foreign reserves and economic performance in Nigeria. The finding corroborates the view that a booming economy has the propensity to attract foreign direct investment thereby boosting the stock of the country’s foreign reserves. To attract more FDI in the critical sectors of the Nigerian economy, the government should create enabling and investment-friendly environment, implement policies and programmes capable of amplify ease-of-doing-business, and boost investors’ confidence in the economy.

Central Bank Reserves and Currency Volatility

We investigate the effects of Central Bank interventions which are designed to smooth exchange rate volatility but are not aimed at a particular trend level. We present a model in which the intervention flow is a non-linear mapping of the market order flow. Simulations show that small daily drifts, Brexit-led in the case of Bank of England and commodity-driven in the Central Bank of Brazil, lead to major impacts on both the stock of foreign reserves and the distribution of currency returns. The likelihood of this increases with the Central Bank's inability to adopt a neutral policy regarding the drifts.

Foreign Aid in the Aftermath of Large Natural Disasters

AbstractThis paper examines Official Development Assistance (ODA) in the aftermath of large natural disasters between 1970 and 2008. Using an event‐study approach, the paper finds that while the median increase in ODA is 18% compared with pre‐disaster flows, the typical surge is small in relation to the size of the affected economies. Moreover, aid surges typically cover only 3% of the total estimated economic damages caused by the disasters. The main determinants of post‐disaster aid surges are found to be the intensity of the event itself and the recipient country's characteristics such as the level of development, country size and the stock of foreign reserves. The paper does not find evidence that political considerations or strategic behavior on the part of donors determine the size of post‐disaster aid surges.

Export taxes in times of trade surpluses

This paper studies the comparative effects between an exchange rate appreciation and the introduction of an export tax as alternative policy responses to address trade surplus concerns in a country with a fixed exchange rate regime facing a downward-sloping world demand curve for its exports. It is found that an exchange rate appreciation would not alter the nature of the long-run equilibrium, and would thus be welfare-neutral. The appreciation would merely supplant foreign reserve accumulation as the mechanism that transits an economy from the short- to long-run equilibria, resulting in a lower long-run stock of foreign reserves. By comparison, an export tax would raise the export price in foreign-currency terms. Provided that the tax revenue is transferred back to consumers in a non-distorting manner, the welfare consequence of the tax would depend largely on the elasticity of the world demand for the country's exports. If the demand is inelastic, both national welfare and the stock of foreign reserves would necessarily rise in the long run as much of the tax burden would be shifted forward to foreign consumers. If the demand is elastic, the change to national welfare would depend on the relative magnitudes of a number of parameters, including most notably the import content of exports.

Currency Crises and Foreign Reserves: A Simple Model

This paper addresses the important question of how far a government will run down its stock of foreign reserves in a defense of a fixed exchange rate. An optimizing model of currency crisis is presented in which the decision of whether or not to borrow in a defense of a peg is explicitly analyzed. The threshold level of reserves is then determined endogenously and shown to be a function of fundamental economic variables. The analysis also demonstrates how an increase in the level of reserves, a credit-rating upgrade, or the imposition of capital controls can remove the multiplicity of equilibria.

The Unorthodox Origins of the Asian Currency Crisis: Evidence from Logit Estimation

I. Introduction The Asian financial crisis, which started on 2 July 1997, was the third region-wide currency crisis in the 1990s. The first regional currency collapse was in Europe in 1992-93 and the second was in Latin America in 1994-95. One would have hoped that the voluminous research dissecting these earlier crises would have given governments and the International Monetary Fund (IMF) some ideas on how to read signs of an approaching regional storm. However, no red lights appeared to have flashed warnings of a crisis for the entire East Asian region before mid- 1997. Only Thailand, with its large current account deficits in 1995 and 1996, looked a possible candidate for a devaluation, and even then the cautionary remarks on Thailand were hedged because these current accounts were seen to be financed by private capital inflows and hence to be sustainable in the medium term. Were the exchange rate collapses in 1997 in Asia really unexpected as claimed by the governments in these countries? It would be naive, of course, not to recognize that these governments would find it convenient to attribute the currency collapses on financial contagion, and divert blame away from any bad policies the governments had implemented. But it would be equally naive not to recognize that financial panic has been part of the human condition ever since asset markets were established.(1) This article attempts to answer whether the currency crises in Indonesia, Malaysia, the Philippines, South Korea and Thailand (henceforth known as the Asian Crisis-5) in 1997-98 were due to a deterioration in their macroeconomic fundamentals or due to financial contagion. Our analysis proceeds in two parts. In the first part, we construct a new real exchange rate index, the Competitor-Weighted Real Exchange Rate (CWRER) for each of the Asian Crisis-5, that emphasizes the currency and price movements of the countries that compete against its top 10 exports. The question asked in the first part is whether loss in trade competitiveness was the over-riding reason for the crisis. The results were ambiguous. In the second part of the paper, we use a richer set of fundamentals to construct a logit model that allowed us to formally estimate the probability of a currency crisis occurring for the five Asian countries in 1997, given the information set that existed in 1996. Our results show that the macroeconomic fundamentals did not predict the currency crises -- thus supporting the claim that the Asian currency crisis was unexpected by investors, governments, and the IMF. We interpret this result as evidence that financial contagion was the main cause of the Asian crisis. This paper is organized as follows. Section II reviews the literature on currency crises. Section III discusses the movements in the real exchange rate of the Asian Crisis-5. Section IV reports the results of the logit estimations. Finally, Section V presents our conclusions. II. Literature Review Roughly speaking, the theoretical literature on currency crisis has gone through three generations. The first generation models identify the source of currency crisis to be misalignment between macroeconomic policies, and the value at which the currency is pegged. The second-generation models emphasize the existence of multiple equilibria and self-fulfilling prophecies. The third generation models highlight the dire consequences of over-investment induced by a moral hazard created either by implicit government guarantee of private debt or by implicit guarantee of a country's foreign debt by the International Monetary Fund (IMF). Krugman (1979) is typical of first generation models. An over-expansionary fiscal deficit is financed by money creation, and this leads to a deficit in the balance of payments that requires the government to run down its foreign exchange reserves to defend the exchange rate peg. Since the country's stock of foreign reserves is finite, the steady decline in the foreign reserves of the central bank will increase the number of speculators who recognize that a devaluation would be forthcoming. …

Collapsing Exchange Rate Regime Under Optimal Monetary Control

In this paper, we analyse the problem of optimal domestic credit expansion for a small open economy. We show that (i) the transition from the fixed to the flexible exchange rate regime proceeds smoothly with no speculative attack on the central bank's foreign reserves; (ii) once the exchange rate has floated, it will never be optimal to repeg it afterward; (iii) even under uncertainty, there will not be any speculative attack; however, the optimal rate of credit expansion jumps discontinuously at the date of complete depletion of the known stock of foreign reserves.

Resource Extraction by a Monopolist with Influence over the Rate of Return on Non-Resource Assets

In the last few years, a number of papers have given treatment to the problem of optimizing resource extraction in an open economy (cf. Dasgupta, Eastwood and Heal [1978], Aarrestad [1978] amoong others). Most of this literature treats the resource price as exogenous for the country considered. There is also a considerable literature treating the optimal resource extraction by a monopolistic firm which can influence the resource price; see for instance Lewis [1976], Stiglitz [1976] and Sweeney [1977]. Some of this literature (Cremer and Weitzman [1976], Hnyilicza and Pindyck [1976], Kalymon [1975] and Schmalensee [1976]) explicitly use OPEC's decision problem as their starting point. However, all of this literature treats the monopolist's rate of return on non-resource assets as independent of the extraction path chosen. For an important resource, for instance, oil, this is clearly an unsatisfactory assumption. In a recent paper, Calvo and Findlay [1978] have analyzed the optimal policy of a resource extracting monopolist (for instance OPEC) when the assumption above is relaxed. On the other hand, their analysis is mainly static and they disregard the crucial fact that the total resource supply is limited. Due to these properties, their paper only gives limited insight into the behavior of a resource extracting monopolist. The present paper gives a dynamic analysis of a monopolist's optimal extraction of a finite resource stock, when the monopolist's rate of return on non-resource assets depends on its resource extraction. One obvious interpretation is OPEC, which owns considerable stocks of foreign reserves and other financial assets. It seems reasonable to expect the rate of return on such assets to depend on the price OPEC charges for its oil. Alternative interpretations are of course also possible; some of these will be given in the concluding sections. Throughout the paper, I will assume that the objective function of the monopolist is some function of the time path of consumption which resource extraction and earnings on other assets give rise to. Two specific objective functions will be considered: (1) the maximin criterion (cf. Solow [1974] for an application of this criterion to a problem of resource extraction), and (2) discounted utility of consumption. In Section 2 the constraints of the optimization problem will