The Impacts of International Reserves on Monetary Independence in Emerging Countries: An Asymmetric Analysis

The level of international reserves could influence the monetary independence of a country. Nonetheless, this relationship is usually estimated in a single structural equation. This article examines the dynamics from a shock in a partial sum of negative and positive changes in the international reserves on monetary independence in 17 emerging countries from 1991 to 2015 by applying the panel vector regressive estimation. The Granger causality analysis indicates that a decline in the international reserve has a unidirectional impact on monetary independence. The impulse response analysis shows that the monetary independence moves in the same direction immediately after a change in the international reserves. The impact reverses a year later before returning to its initial trend. Besides, the negative partial sum of international reserves has a more lingering effect on monetary independence. Otherwise, the variance decomposition analysis suggests that the monetary independence movement is partially explained by the shock in international reserves, albeit the magnitude is relatively small. The outputs imply that sterilization has played a critical role in moderating the negative effect of raising international reserves on monetary independence. In sum, hoarding of international reserves needs to be complemented with effective sterilization.