An Empirical Investigation Of Factors That Determine Demand For International Reserves In The Sadc Region

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.