Article Sidebar

Submitted
November 15, 2022
Accepted
March 26, 2024
Published
April 1, 2024
Download
Full text PDF
Statistic
Read Counter : 604 Download : 1069

Downloads

Download data is not yet available.

Main Article Content

Abstract

Purpose – Central banks’ foreign reserve stocks in emerging markets have increased substantially in recent decades. Foreign reserves accumulation has been widely believed as a shock absorber to prevent financial crises. Meanwhile, accelerating foreign reserves might be contradictory to the monetary policy objectives. This research aims to investigate the impact of foreign reserves on the inflation dynamics.
Method – We apply the inflation-expectation augmented Phillips curve on the monthly data over the period of 2005(7) to 2020(12) in the case of Indonesia.
Findings – We show that stockpiling foreign exchange reserves indeed has an inflationary pressure impact. The central bank's intervention in the foreign exchange market is more significant in selling rather than purchasing foreign exchange. However, the non-monetary factors also play an important role in determining inflation.
Implications – Considering channels through which foreign reserves might affect inflation, our findings suggest the monetary authority should be concerned with inflationary expectations in the short term as one of the major policy-driven goals to maintain price stability in the long run.
Originality – This paper contributes to the literature on monetary policy in developing countries. Unlike other empirical studies, this research employs the inflation-expectation augmented Phillips curve and accommodates the issue of asymmetric effects of the change in foreign reserves.

Keywords

Foreign Reserves Inflation Phillips Curve Central Bank Intervention Exchange Rates

Article Details

License

Copyright (c) 2024 Haryo Kuncoro

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Authors who publish with this journal agree to the following terms:

  1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-ShareAlike 4.0 International License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
  2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
  3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).

Creative Commons License

Economic Journal of Emerging Markets by Center for Economic Studies, Universitas Islam Indonesia is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

How to Cite
Kuncoro, H. (2024). The role of foreign reserves in inflation dynamics. Economic Journal of Emerging Markets, 16(1), 1–12. https://doi.org/10.20885/ejem.vol16.iss1.art1
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX

References

  1. Adler, G., Chang, K. S., & Wang, Z. (2021). Patterns of foreign exchange intervention under inflation targeting. Latin American Journal of Central Banking, 2(4), 100045. https://doi.org/10.1016/j.latcb.2021.100045
  2. Agénor, P. R., Jackson, T. P., & Silva, L. P. (2020). Foreign exchange intervention and financial stability (889; BIS Working Papers).
  3. Andriyani, K., Marwa, T., Adnan, N., & Muizzuddin, M. (2020). The determinants of foreign exchange reserves: Evidence from Indonesia. The Journal of Asian Finance, Economics and Business, 7, 629–636. https://doi.org/10.13106/jafeb.2020.vol7.no11.629
  4. Ariyasinghe, A., & Cooray, N. S. (2021). The nexus of foreign reserves, exchange rate, and inflation: Recent empirical evidence from Sri Lanka. South Asia Economic Journal, 22(1), 29–72. https://doi.org/10.1177/1391561420987106
  5. Blanchard, O. J., & Summers, L. H. (1987). Hysteresis in unemployment. European Economic Review, 31(1), 288–295. https://doi.org/10.1016/0014-2921(87)90042-0
  6. Calvo, G. A., & Reinhart, C. M. (2002). Fear of floating. The Quarterly Journal of Economics, 117(2), 379–408. https://doi.org/10.1162/00335530275365027
  7. Chaudhry, I., Akhtar, M., Mahmood, K., & Faridi, M. (2011). Foreign exchange reserves and inflation in Pakistan: Evidence from ARDL modeling approach. International Journal of Economics and Finance, 3. https://doi.org/10.5539/ijef.v3n1p69
  8. Chen, L., & Huang, S. (2012). Transmission effects of foreign exchange reserves on price level: Evidence from China. Economics Letters, 117(3), 870–873. https://doi.org/https://doi.org/10.1016/j.econlet.2012.06.037
  9. Cheung, Y.-W., & Qian, X. (2009). Hoarding of international reserves: Mrs. Machlup’s Wardrobe and the Joneses. Review of International Economics, 17(4), 824–843. https://doi.org/https://doi.org/10.1111/j.1467-9396.2009.00850.x
  10. Chiṭu, L., & Quint, D. (2018). Emerging market vulnerabilities – A comparison with previous crises (Issue 8; ECB Economic Bulletin).
  11. Dadush, U., & Stancil, B. (2011). Why are reserves so big? Centre for Economic Policy Research (CEPR). https://cepr.org/voxeu/columns/why-are-reserves-so-big
  12. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American statistical association, 74(366a), 427-431. https://doi.org/10.2307/2286348
  13. Elhiraika, A., & Ndikumana, L. (2007). Reserves accumulation in African countries: Sources, motivations, and effects (24; Economics Department Working Paper Series).
  14. Enders, W. (2004). Applied econometric time series (2nd ed.). John Wiley & Sons.
  15. Ghosh, A., Jonathan, R., Ostry, D., & Tsangarides, C. (2017). Shifting motives: Explaining the build-up in official reserves in emerging markets since the 1980s. IMF Economic Review, 65(2), 308–364. https://doi.org/10.1057/s41308-016-0003-3
  16. Granger, C. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424–438. https://doi.org/10.2307/1912791
  17. Gujarati, D. N., Porter, D. C., & Gunasekar, S. (2012). Basic econometrics. McGraw Hill Education.
  18. Heller, H. R. (1976). International reserves and worldwide inflation. IMF Staff Papers, 23(1), 61–87.
  19. Ho, S. Y., & Iyke, B. N. (2019). Unemployment and inflation: Evidence of a nonlinear Phillips curve in the Eurozone. Journal of Developing Areas, 53(4), 151–163.
  20. Hodrick, R., & Prescott, E. (1997). Postwar U.S. business cycles: An empirical investigation. Journal of Money, Credit and Banking, 29(1), 1–16. https://doi.org/10.2307/2953682
  21. Insukindro, I., & Sahadewo, G. A. (2010). Inflation dynamics in Indonesia: Equilibrium correction and forward-looking Phillips curve approach. Gadjah Mada International Journal of Business, 12(1), 117–33. https://doi.org/10.22146/gamaijb.5515
  22. Jeffrey, C., Hinge, D., Hardie, D., King, R., Barreira, V. M., Towning, W., & Shen, A. (2021). Reserve manager of the year: Bank Indonesia. Infopro Digital Services Limited. https://www.centralbanking.com/awards/7806876/reserve-manager-of-the-year-bank-indonesia
  23. Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian Vector autoregressive models. Econometrica, 59(6), 1551–1580.
  24. Juhro, S. M., & Iyke, B. N. (2019). Forecasting Indonesian inflation within an inflation-targeting framework: Do large-scale models pay off? Buletin Ekonomi Moneter Dan Perbankan, 22(4), 423–436. https://doi.org/10.21098/bemp.v22i4.1235
  25. Kamin, S. B., & Klau, M. (2003). A multi-country comparison of the linkages between inflation and exchange rate competitiveness. International Journal of Finance and Economics, 8(2), 167–184. https://doi.org/10.1002/ijfe.205
  26. Khan, M. S. (1979). Inflation and international reserves: a time-series analysis. IMF Staff Papers, 26(4), 699–724.
  27. King, R. G., Stock, J. H., & Watson, M. W. (1995). Temporal instability of the unemployment-inflation relationship. Economic Perspectives, 19, 2–13.
  28. Kruskovic, B. D., & Maricic, T. (2015). Empirical analysis of the impact of foreign exchange reserves to economic growth in emerging economies. Applied Economics and Finance., 2(1), 102–9. https://doi.org/10.11114/aef.v2i1.653
  29. Kuncoro, H. (2015). Inflation targeting, exchange rate pass-through, and monetary policy rule in Indonesia. International Journal of Business, Economics, and Law, 7(3), 14–25.
  30. Kuncoro, H. (2020). Interest rate policy and exchange rates volatility lessons from Indonesia. Journal of Central Banking Theory and Practice, 9(2), 19–42. https://doi.org/10.2478/jcbtp-2020-0012
  31. Lin, M. Y., & Wang, J. S. (2009). Foreign exchange reserves and inflation: An empirical study of five East Asian economies. Empirical Economics Letters, 85(5), 487–493.
  32. Mohanty, M. S., & Turner, P. (2006). Foreign exchange reserve accumulation in emerging markets: What are the domestic implications? In BIS Quarterly Review (September).
  33. Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957. Economica, 25(100), 283–299. https://doi.org/10.2307/2550759
  34. Portes, R. (2010). Global Imbalances. In M. Dewatripont, X. Freixas, & R. Portes (Eds.), Macroeconomic stability and financial regulation: Key issues for the G20. Centre for Economic Policy Research.
  35. Salisu, A. A., & Isah, K. O. (2018). Predicting US inflation: Evidence from a new approach. Economic Modelling, 71(C), 134–158.
  36. Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2012). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1807745
  37. Steiner, A. (2010). Central banks’ dilemma: Reserve accumulation, inflation and financial stability (84; Working Paper Series).
  38. Steiner, A. (2017). Does the accumulation of international reserves spur inflation?, 41, 112–32. North American Journal of Economics and Finance, 41, 112–32. https://doi.org/10.1016/j.najef.2017.03.007
  39. Stock, J. H., & Watson, M. W. (1999). Forecasting inflation. Journal of Monetary Economics, 44(2), 293–335. https://doi.org/10.1016/S0304-3932(99)00027-6
  40. Trinh, P. T. T. (2015). Impact of accumulation foreign exchange reserves on inflation: VAR approach. Journal of Economic Development, 26(4), 46–68.
  41. Zhou, L. (2014). Foreign exchange reserves and inflation, can monetary policy explain the changes? Journal of Chemical and Pharmaceutical Research, 6(6), 572–576.
No Related Submission Found