Measuring non-linear effects of exchange rate movements on reserve holdings

Download This Article

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

Abstract

Due to flaws in fiscal and financial structures, currency rate changes have detrimental effects on emerging economies. The lack of financial protection tools and insufficient levels of financial market development leaves African nations exposed to such harmful consequences of rates of exchange volatility. This study attempted to investigate the impact of exchange rate movements on the volume of reserves held by African countries struggling to maintain enough earnings to warrant floating their currency against the dollar. The non-linear autoregressive distributed lag (NARDL) of Shin et al. (2014) filters movements in exchange rates into the negative and positive partial sum, respectively. We found that devaluation weakens reserve volume in Morocco, Namibia, Nigeria, South Africa, Zambia, Kenya, Malawi and Mauritius. Exchange rate appreciation significantly decreases Ghana, Kenya, South Africa, and Mauritius reserves. The magnitude of exchange rate devaluation, 0.94, 0.85, and 0.91 in Nigeria, Malawi, and Zambia, as reported by the positive cumulative sum of the changes in the exchange rate, exceeded the magnitude of appreciation, 0.12, 0.10, and 0.17, respectively. Accordingly, the effects of exchange rates on reserves in Ghana, Malawi, Morocco, Nigeria, Namibia, and Zambia are asymmetric, while the impact in Egypt, Kenya, South Africa, and Mauritius is symmetric.

Keywords: Non-Linear Autoregressive Distributed Lag (NARDL), Currency Devaluation, Exchange Rate Movements, Reserves, African Countries

Authors’ individual contribution: Conceptualisation — D.U.; Methodology — D.U., W.O.O., O.E., A.I.O., and E.T.O.; Software — D.U., W.O.O., O.E., A.I.O., and E.T.O.; Validation — O.E., S.O.A., A.I.O., B.O.A., and A.-O.I.I.; Formal Analysis — D.U., W.O.O., S.O.A., E.T.O., and A.-O.I.I.; Investigation — D.U., A.I.O., E.T.O., and R.H.; Data Curation — D.U., W.O.O., S.O.A., B.O.A., and R.H.; Writing — D.U., W.O.O., O.E., S.O.A., G.O., B.O.A., E.T.O., A.-O.I.I., and R.H.; Supervision — D.U., S.O.A., and A.I.O.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: The Authors extend appreciation to colleagues in the Faculty of Arts, Management & Social Sciences of Edo State University Uzairue for their valuable discussions and submission after the initial draft. Finally, the corresponding author sincerely express his gratitude to Prof. Ben Imimole for his suggestions that enhanced final version of the manuscript before publication.

JEL Classification: F31, C22, C52

Received: 30.08.2022
Accepted: 13.02.2023
Published online: 16.02.2023

How to cite this paper: Umoru, D., Odiwo, W. O., Ebhote, O., Akhor, S. O., Otsupius, A. I., Ohiokha, G., Abere, B. O., Omoluabi, E. T., Iyoha, A.-O. I., & Hussaini, R. (2023). Measuring non-linear effects of exchange rate movements on reserve holdings. Corporate & Business Strategy Review, 4(1), 131–141. https://doi.org/10.22495/cbsrv4i1art12