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A higher financial premium leads to the depletion of foreign reserves?

Author

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  • Fuhmei Wang

    (National Cheng Kung University, Taiwan)

Abstract

Previous literature believes that a commercial depreciation is associated with higher financial premium and more depletion of foreign reserves. This study re-investigates this belief. Analytical results indicate that a commercial depreciation with higher financial premium and more depletion of foreign reserves depend on the combined influences of the conditions that individuals are impatient as well as foreign interest rates are bigger than time preference rates rather than only policies of commercial depreciation. Non-distortion taxation does not solve the balance-of-payments difficulties. An exact negative relationship between foreign reserves and the financial premium cannot be found.

Suggested Citation

  • Fuhmei Wang, 2014. "A higher financial premium leads to the depletion of foreign reserves?," Journal of Developing Areas, Tennessee State University, College of Business, vol. 48(3), pages 77-93, July-Sept.
    • Handle: RePEc:jda:journl:vol.48:year:2014:issue3:pp:77-93
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    More about this item

    Keywords

    Leakages; Taxation; Dual Exchange Markets;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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