Abstract

This paper empirically studies the accumulation of foreign exchange reserves by the countries of India and China. Particularly, it focuses on the determinants of this policy and on the role that the choice of exchange rate regime plays in driving it. Annual data points for the years between 1980 and 2003 were collected and their frequency increased to quarterly through a quadratic match process. The accumulation of foreign exchange reserves in India is best explained as a function of exchange rate volatility and the degree of openness of the economy. The impact of one-time shocks, such as currency devaluations, and structural shocks, such as trade liberalization, are captured in the estimating equation. Alternative independent variables are also tested. The factors driving the accumulation of foreign exchange reserves in China remain a puzzle.

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Economics

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