Estimating the Demand for International Reserves Function in Nigeria: Evidence from Vector Auto-Regressions

International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue II, February 2021 | ISSN 2454–6186

Estimating the Demand for International Reserves Function in Nigeria: Evidence from Vector Auto-Regressions

Blessing Ose Oligbi Ph D^1*, Milton A. Iyoha Ph D^2
1Ag Head, Department of Economics & Development Studies, Igbinedion University, Okada, Edo State, Nigeria.
²Professor of Economics, University of Benin, Benin City, Nigeria
*Corresponding Author

Abstract: – This study estimates the demand for international reserves function in Nigeria using vector auto-regressions, and annual time-series data for 1980-2017. The result obtained indicates that there is a stable, long- run relationship between international reserves, exports, openness, interest rate and export earnings volatility. Variance decomposition analysis shows the main sources of economic growth variations in Nigeria are attributable to “own shocks” and only slightly to other variables, namely, exports and openness. Thus, the study recommends that the government should adopt trade and exchange rate policies to promote exports in order to increase international reserve holdings and accelerate economic growth in Nigeria.

Key words: International reserves, Nigeria, vector auto-regressions

JEL classifications: F14, F30, F32, F36

I. INTRODUCTION

Even though the world has long abandoned a fixed exchange rate system, the need for holding international reserves has remained. The need to hold reserves is even more warranted as most countries now have a “managed” exchange rate system. It should be apparent that in a world of managed exchange rates, holding of international reserve assets remains important and necessary. This is especially true for developing countries which depend heavily on the exportation of primary commodities whose prices often fluctuate widely. In any case, according to the IMF (1974), there are reasons to hold reserves apart from the financing of payments deficits. Note that the reasons which include the necessity to own reserves to facilitate foreign borrowing remained unchanged when the international monetary system of fixed exchange rates was jettisoned. International reserve assets consist of monetary gold, convertible foreign exchange, special drawing rights (SDRs), and reserve positions (gold tranche and super gold tranche) with the International Monetary Fund (IMF), owned and held by the central banks of various countries. Many researchers have found it convenient to summarize the motives for holding international reserve assets as arising from both precautionary and mercantile needs. Basically, the precautionary motive for holding international reserves refers to the need to hold foreign reserves to forestall shortage

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