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Reserves quantity and economic stability: the central bank of Ghana's position and practices.

ABSTRACT: Discussions on Reserve Adequacy Assessment on a country-specific basis have been scant in the literature despite its significance. This situation has led to calls for the discussions on reserves holdings and adequacy levels to be more rooted in the country's Article IV consultation report. In this study, we examined if reserves build-up by the central bank of Ghana meets the specific metrics of theoretical reserve models such as the reserves to M2 growth metrics and the Greenspan-Guidotti rule metrics. We also determined whether the reserves build-ups correctly adjust to economic and policy variables and whether these adjustments are consistent with the predictions of empirical theories and findings. We again examined whether exchange rate depreciations contribute to positive reserves accumulation by the central bank of Ghana. Using Vector Error Correction Model, this research has rejected the short-run matching of the reserves stock of the central bank of Ghana to the theoretical standard metrics of 20% of broad money and 100% of short-term debts. These results have implications on the future credit ratings of the country and could also make future borrowing more expensive. Also, the impulse response functions showed a mixed result of the adjustments in reserves build-up to the predictions of empirical theories and findings. Additionally, the analysis proved the long-run test of restriction of exchange rate depreciation on positive reserves build-up of the central bank. However, the short-run adjustments of the exchange rates on reserves rejected this relationship. Furthermore, the decomposition analyses showed that short-run variations in reserves are explained by external forces, whereas the long-run variations are explained through the financial sector and partly by external forces. Therefore, an econometric specification of reserves beyond three months must specify in the model both the financial sector and external sector variables.

SUBMITTER: Abdul-Rahaman AR

PROVIDER: S-EPMC6926204 | biostudies-literature | 2019 Dec

REPOSITORIES: biostudies-literature

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Reserves quantity and economic stability: the central bank of Ghana's position and practices.

Abdul-Rahaman Abdul-Rashid AR Yao Hongxing H

Heliyon 20191212 12

Discussions on Reserve Adequacy Assessment on a country-specific basis have been scant in the literature despite its significance. This situation has led to calls for the discussions on reserves holdings and adequacy levels to be more rooted in the country's Article IV consultation report. In this study, we examined if reserves build-up by the central bank of Ghana meets the specific metrics of theoretical reserve models such as the reserves to M2 growth metrics and the Greenspan-Guidotti rule m ...[more]

PMID: 31890932

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Dataset Information

Reserves quantity and economic stability: the central bank of Ghana's position and practices.

Publications

Reserves quantity and economic stability: the central bank of Ghana's position and practices.

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