Journal of Finance and Economics

Journal of Finance and Economics

ISSN: 2291-4951 (Print)    ISSN: 2291-496X (Online)

Volume 4 (2016), No. 4, Pages 36-50

DOI: 10.12735/jfe.v4n4p36

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An Examination of Foreign Exchange Reserve and Inflation Relationship of Four West African Countries: Evidence from ADRL Model

DRAMA Bédi Guy Hervé1 

1Département de Sciences Economiques et de Gestion Université Peleforo Gon Korhogo-Côte d’Ivoire

URL: http://dx.doi.org/10.12735/jfe.v4n4p36

To Cite this Article     Article Views: 493     Downloads: 262  Since deposited on 2016-10-14

Abstract

The objective is to provide the empirical evidence regarding the relationships between foreign exchange reserves and inflation for four West African countries namely Cote d’Ivoire, Senegal, Ghana and Nigeria. A comparison of empirical evidence is obtained from the Autoregressive distributive lag model (ARDL) proposed by Pesaran, Shin and Smith (2001) using annual data running the period of 1972 to 2014. The empirical result shows that the relationship between the change in foreign exchange reserves and inflation rate is positive for the countries cited above in long run but the overall short run estimation of our model is insignificant at the conventional level. This means that rise in foreign exchange reserves leads to increase the rate of inflation. Regarding our investigation results, the study suggests that governments of these countries cited above should pay more attention to foreign exchange system management by enlarging open market operations. Moreover, they can use sterilization or other policy instruments to reduce foreign exchange reserves to stabilize domestic economy. According our overall empirical results, we propose the following suggestions. First, the central bank expands the base money supply channels and offers a variety of sterilization methods. Second, reinforce coordination of monetary and fiscal policy, and adopt comprehensive measures to promote the international payments balance. As West African countries’ economy is growing rapidly, exchange reserves will still growth and the inflation is an urgent issue too. Therefore, it’s still very important for these countries to reduce the negative effect of the excessive foreign exchange reserves.

JEL Classifications: O13, Q14

Keywords: inflation, foreign exchange, ARDL model, GDP deflator, error correction, West Africa

To Cite this Article: Drama, B. G. H. (2016). An examination of foreign exchange reserve and inflation relationship of four West African countries: Evidence from ADRL model. Journal of Finance and Economics, 4(4), 36-50. http://dx.doi.org/10.12735/jfe.v4n4p36

Copyright © DRAMA Bédi Guy Hervé

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This article is published under license to Science and Education Centre of North America. This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International License.

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An Examination of Foreign Exchange Reserve and Inflation Relationship of Four West African Countries: Evidence from ADRL Model
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