An investigation of the determinants of foreign exchange reserves in Southern African countries.
South Africa - 1 January 2019
Trade topics: Other
The controversy whether the “fear of floating” or the “fear of capital mobility” determines a country’s foreign reserve holdings is an ongoing research debate. This issue remains unresolved in global economic and finance studies. This study has the aim to contribute to the ongoing debate by probing the determinants of foreign exchange reserves in Southern African countries. This study makes use of the annual data sets over the period of 26 years from 1990 to 2015, with the application of the ARDL approach within a panel econometric framework. Variables included in the model are foreign reserves, capital inflows, exports, inflation, exchange rate and imports. The empirical findings show the existence of cointegration amongst the studied variables. The findings show that exports, inflation rate, exchange rate and imports are significant determinants of foreign reserve holdings in the long run and with all the variables having positive impacts, except for import demand. Meanwhile, capital inflow was found to be a non-significant determinant of reserve holdings in the long run. Evidence from the short-run analysis shows that all the independent variables, with the exception of exchange rate, do not significantly determine reserve holdings. The study concludes that “fear of floating” rather than “fear of capital” is a significant driver or determinant of foreign reserves in Southern African countries.