Foreign Exchange Reserves in Asia and Its Impact on Import Demand

Abstract

Some Asian countries have experienced increases in the level of their foreign exchange reserves as well as increases in their import volume. Theory suggests that as the level of exchange reserves increases, it may affect the demand for imports since more funds will be available for imports. In this paper, we employ quarterly data of five Asian countries and test the null hypothesis that the import demand behavior in India, Japan, Korea, Singapore, and Thailand are not determined by real income, relative import price, and foreign exchange reserves. The empirical analysis of import demand behavior is presented using the dynamic error-correction model, which allows an explicit parameterized division of effects into long-run influences, short-term adjustment and error-correction term. It uses econometric techniques organized around Johansen, Harris-Inder, and Hansen Lccointegration analyses; fully modified OLS, dynamic OLS and ARDL to estimate long-and-short run demand elasticities.