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The demand for international liquidity: a cointegration approach

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  • Costas Karfakis

Abstract

This paper first examines the existence of a long-run demand for foreign reserve holdings in Greece and second, tests for its temporal instability using time series techniques. Cointegration tests reveal the existence of a systematic long-run relationship between real reserves, real income, average propensity to import and the eurodollar interest rate. An interesting aspect of the cointegration analysis is the evidence that the demand for international liquidity is not characterized by economies of scale. The Hansen—Johansen (1993) recursive analysis results indicated that the cointegrating equation was stable over the nominal exchange rate targeting period 1988-92, implying that the reserve holdings play a significant role in the balance of payments adjustment process.

Suggested Citation

  • Costas Karfakis, 1997. "The demand for international liquidity: a cointegration approach," Applied Financial Economics, Taylor & Francis Journals, vol. 7(6), pages 673-678.
    • Handle: RePEc:taf:apfiec:v:7:y:1997:i:6:p:673-678
    DOI: 10.1080/758533859
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    Cited by:

    1. Rachna Agrawal & Ashima Verma, 2023. "Investigating the efficiency of foreign exchange reserves using stochastic frontier analysis: Evidence across the globe," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1376-1390, April.
    2. Gab‐Je Jo, 2011. "Analysis Of International Reserve Hoarding In Korea," Pacific Economic Review, Wiley Blackwell, vol. 16(2), pages 154-167, May.

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