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Determinants of International Reserves in Bangladesh: An ARDL Approach 1 Iftekhar Uddin Ahmed Chowdhury* and 2Leema Sen Gupta 1 Lecturer, Access Academy, Asian University for Women, Chittagong-4000, Bangladesh Lecturer, Access Academy, Asian University for Women, Chittagong-4000, Bangladesh Email Address: [email protected]*, [email protected] Cell no: +8801716481684; +8801718210822 2 Abstract In an open economy, the foreign currency reserves are an important index that estimates a country’s external economic relationships in terms of exports and capital inflow. By regulating the foreign currency reserves, a country can achieve both internal and external economic balances and establish macroeconomic targets. Therefore, this study attempts to empirically estimate the long-run determinants of international reserves in Bangladesh using annual time series data for the period 1976-2015. Stationarity properties of the data series are checked by using ADF, KPSS, and PhilipsPerron unit root tests. The paper applied well-established autoregressive distributed lag (ARDL) bounds testing approach of cointegration to examine the existence of a long-run relationship. Empirical results of the study confirmed the existence of a long-run stable equilibrium among the variables in the model and conclude that the trade openness, economic size, current account vulnerability, exchange rate flexibility and the opportunity cost of reserve accumulation are significant factors explaining the core determinants of international reserves in Bangladesh. In addition, the Error Correction Model (ECM) has been utilized to detect the long run divergence from the equilibrium relationship between the explanatory variables and international reserves in the specified model. The speed of adjustment in the estimated model is relatively high and had the expected significant and negative sign which suggests that Bangladesh Bank needs to engage in more active reserve management practices. Keywords: ARDL approach, Bangladesh, Determinants, International reserves.
