An Empirical Investigation into the Demand for International Reserve using Precautionary and Mercantilist Approach

Abstract

The study aims at analyzing the determinants of the continuous accumulation of foreign reserves in Bangladesh like in other emerging and developing countries. The paper investigates the mercantilist and precautionary motive for hoarding reserves, taking monthly data from 2010:06 to 2019:12. To establish the long-run relationship between foreign reserves and their determinants, the ARDL model has been used. The result shows precautionary variables mainly contribute to accumulating the volume of reserves. The sterilization index results show no sterilization of the central bank to devaluate the exchange rate and the deviation of the real effective exchange rate, which captures the mercantilist motive, remains insignificant in the long run.