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Econometric VAR Analysis of the Effect of the Foreign Exchange Reserves on Macroeconomic Variables in Emerging Countries: The Case of BRIC Countries

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  • Borivoje D. Krušković

Abstract

This paper analyses the effects of the foreign exchange reserves accumulation on the key nominal and real macroeconomic variables (GDP, employment, prices and exchange rates) in BRIC countries (Brazil, Russia, India, China). VAR model was used to empirically examine the effect of accumulation of foreign exchange reserves on macroeconomic variables. The empirical results in this paper show that after the initial shock of foreign exchange reserves, the exchange rate appreciation occurs, which can be explained by the fact that a higher level of foreign exchange reserves gives investors and rating agencies a lower risk of the country, which can consequently lead to appreciation of the foreign exchange rate. In this way, the price reaction would be neutralized. Consequently, the growth of foreign exchange reserves leads to the growth of economic activity measured by GDP growth.

Suggested Citation

  • Borivoje D. Krušković, 2023. "Econometric VAR Analysis of the Effect of the Foreign Exchange Reserves on Macroeconomic Variables in Emerging Countries: The Case of BRIC Countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 12(3), pages 87-109.
    • Handle: RePEc:cbk:journl:v:12:y:2023:i:3:p:87-109
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    More about this item

    Keywords

    foreign exchange reserves; VAR; exchange rate; employment; economic growth; inflation.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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