The demand for international reserves: A case study of Pakistan

Abstract

Reserves-holding policy has been a main area of concern for policy-makers, researchers, and planners since the beginning of the Bretton Woods system. As a result, issues related to the equilibrium of international reserves, its determinants, and the departure from equilibrium have been widely discussed in the debates of economic policy-making. In spite of its importance, no serious attempt has been made to work on the determinants of international reserves in the case of Pakistan. Therefore, we have made an endeavour to determine the long-run and short-run determinants of Pakistan's international reserves-holding and, hence, we hope to contribute to the literature on reserves in the case of Pakistan. We have also considered the role of monetary disequilibrium in the short-run, along with the other determinants in the explanation of international reserves-holding. In the context of cointegration-error correction framework, we have analysed Pakistan's reserve demand using the quarterly data over the period 1982:1-2003-2 and found that there exists a stable long-run reserves demand function in the case of Pakistan. The results also confirm the role of domestic monetary disequilibrium for changes in reserves in the short-run.