Comparative Study: Factors that Affect Foreign Currency Reserves in China and India

Romero · Ana María

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

This paper empirically studies the accumulation of foreign exchange reserves by the countries ofIndia and China. Particularly, it focuses on the determinants ofthis policy and on the role that the choice of exchange rate regime plays in driving it. Annual data points for the years between 1980 and 2003 were collected and their frequency increased to quarterly through a quadratic match process. The accumulation of foreign exchange reserves in India is best explained as a function of exchange rate vQlatility and the degree of openness of the economy. The impact of one-time shocks, such as currency devaluations, and structural shocks, such as trade liberalization, are captured in the estimating equation. Alternative independent variables are also tested. The factors driving the accumulation of foreign exchange reserves in China remain a puzzle.

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References

2003The high demand for international reserves in the Far East: What is going on?2000Fear of Floating 2004International Reserve Holdings with Sovereign Risk and Costly Tax Collection 2016Fear of Floating 1965The Demand for International Reserves 2001Reserve Adequacy in Emerging Market Economies 1974The Demand for International Reserves by Developed and Less-Developed Countries 2001Holding International Reserves in an Era of High Capital Mobility

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