ARE CENTRAL BANK RESERVES AN IMPORTANT INSTRUMENT FOR STABILITY IN EXCHANGE RATES?

Abstract

Purpose- In developing countries, the most important macroeconomic variable shaping individuals' expectations for economic stability is the nominal exchange rate. For this reason, the first impact of central banks monetary policy implementation results comes out at nominal exchange rate. In this study, the relationship between the nominal exchange rate and the gross foreign exchange reserves of the central bank has been investigated.

Methodology- In this study, Dickey-Fuller (1981, ADF) and Phillips-Perron (1988, PP) unit root tests, asymmetrical causality test and lastly Bootstrap Rolling Window Causality tests developed by Balcılar et al. (2010) have been used.

Findings- There is a causal relationship between the nominal exchange rate and central bank reserves. Central bank interfere in nominal exchange rate with its reserves rather than interest policy.

Conclusion- As a result of the empirical analysis, causality has been found from positive shocks coming to nominal exchange rates to positive shocks in central bank gross foreign exchange reserves and from positive shocks formed in central bank gross foreign exchange reserves to negative shocks coming in nominal exchange rate.

Keywords

• Exchange rates,central banking,causality,asymmetric causality,bootstrap rolling window causality

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