AN EMPIRICAL INVESTIGATION OF FACTORS THAT DETERMINE DEMAND FOR INTERNATIONAL RESERVES IN THE SADC REGION
Date
2020-09-23
Authors
MANJA, LASTON PETRO
Journal Title
Journal ISSN
Volume Title
Publisher
UNIVERSITY OF MALAWI
Abstract
With levels of international reserves in countries of the Southern African Development
Community (SADC) reaching unprecedented high levels in spite of increased
liberalization in the region, the search for responsible factors has reached a fascinating
peak. Provided that recent studies covering wider economic structures find precautionary
motives to be more relevant in explaining the phenomenon in the modern era, this study
aims at unraveling the determinants of demand for international reserves in this economic
structure by mainly augmenting the buffer stock model. For a sample period from 1980 to
2015, the study adopts the Blundell-Bond System Generalized Method of Moments
(GMM) and the Bias-Corrected Least Squares Dummy Variable (LSDVC) estimators, all
due to their suitability in allowing the inclusion of a lagged dependent variable as a
regressor in the model while handling any possible endogeneity. It is found that there
exists a U-shaped relationship between reserves hoarding and development in the region.
Additionally, opportunity costs, exchange rate and reserves volatility (adjustment costs)
as well as membership to the Common Monetary Area (CMA) and the MMZT (Malawi,
Mozambique, Zambia and Tanzania) are significant determinants of demand for reserves
in the SADC. This signals that unions within the SADC will likely result in a higher
demand for reserves as economies seek to meet subsequent reserve targets. In terms of
the longstanding debate between precautionary and mercantilist motives for reserves
demand, the study finds evident precautionary rather than mercantilist factors in the
SADC region as is the case with most low income countries.
Description
International Economics