An Empirical Analysis of China’s International Reserves Demand Function

Abstract

The study aims to estimate an international reserves demand model for China using economic growth, propensity to import, real effective exchange rate and trade openness variables for quarterly period spanning from 1985Q1 to 2014Q4.The bounds testing technique to cointegration is used to test for a long run relationship, while the autoregressive distributed lag approach is used to estimate short run and long run coefficients. The bounds F-test critical values generated by Pesaran et al. (2001) are used for comparison.A long run cointegration relationship is found among the variables when international reserves demand is the dependent variable; and international reserves demand to be significant at conventional levels with respect to propensity to import and trade openness only in the long run. The error correction term is found negative and statistically significant in the short run.