THE OPTIMAL DEMAND FOR FOREIGN EXCHANGE RESERVES IN PAKISTAN

Abdul Jalil and Sheharyar Bokhari

International Journal of Applied Econometrics and Quantitative Studies, 2008, vol. 5, issue 1, 33-48

Abstract: Using monthly data on foreign exchange reserves from June 1995 through June 2005, we find that in line with other country-specific studies the opportunity cost of holding reserves played a greater role than reserve volatility in determining the level of reserves in Pakistan. Our finding is in contrast with the hypothesis of increased capital mobility that is commonly set forth in explaining the precautionary motive for reserve holdings. As also pointed by Ramachandran (2004), this result could perhaps be attributed to the fact that capital outflow in Pakistan (as also in India) is not as free as capital inflow and a large part of the recent reserve accumulation is due to non-debt reserve inflows.

Keywords: Foreign Exchange Reserves; Optimal Demand; GARCH; Pakistan (search for similar items in EconPapers)
JEL-codes: E58 F32 F37 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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