An Econometric Analysis of the Determinants of Foreign Exchange Reserves in Bangladesh

Abstract

This study undertakes an econometric analysis of the determinants of foreign exchange reserves. Yearly time series data have been used to figure out that type of relevant variables that are very much momentous for the determinants of foreign exchange reserves. This paper attempts to identify the key determinants of foreign exchange reserves in Bangladesh using Augmented Dicky Fuller (ADF) unit root test to examine the stationarity, Engle Granger residual based co-integration approach to show the co-integrating relationship among variables, and diagnostic tests for better modeling. The empirical results confirm that there exists a strong relationship among foreign exchange reserves, exchange rate, remittance, home interest rate, broad money 〖(M〗_2), UPI of export and import, and per capita GDP. The coefficients are found to change smoothly, as a function of seven threshold variables- out of nine candidates where six variables are statistically significant. Drawing inferences from these findings, it can be suggested that exchange rate, a strong remittance related policies, quality items of exports, and sustainable GDP can keep a substantial and feasible roles to make up a healthy amount of foreign exchange reserves for the host country like Bangladesh.