How stable is the demand for international reserves?

Abstract

Previous research that has tested the stability of the reserve demand function uses panel data, without incorporating any adjustment process into the testing procedure when providing evidence of instability in reserve demand. In this article, we use time-series data, as well as a bounds testing approach to error-correction modelling that incorporates the adjustment process, to show that reserve demand function is stable in 20 of the 22 Organisation for Economic Co-operation and Development (OECD) countries in our study.

Notes

¹Aizenman and Lee (2007) incorporated the peso and Asian crises into their model and concluded that self-insurance is an important determining factor for the reserve demand in developing countries.

²For applications of this approach in other areas see Halicioglu (2007), Narayan et al. (2007), Tang (2007), Mohammadi et al. (2008) and Wong and Tang (2008).

³This is the upper-bound critical value at the 10% level of significance that comes from Pesaran et al. (2001, Table CI(iii), p. 300).

⁴These short-run results are not reported but are available from the authors upon request.

⁵For other volatility measures of the exchange rate, see Bahmani-Oskooee and Hegerty (2007).