The Determinants of the Demand for International Reserves in Mexico: A Vector Error Correction Model

Garza-Rodriguez, J. et al. (2015). The determinants of the demand for international reserves in Mexico: a vector error correction model, Journal of Advanced Studies in Finance, (Volume VI, Summer), 1(11):12-20. DOI:10.14505/jasf.v6.1(11).02.

Posted: 24 Dec 2015 Last revised: 10 Jan 2016

See all articles by Jorge Garza-Rodriguez

Jorge Garza-Rodriguez

Universidad de Monterrey

Luis Gonzalez-Gamez

Universidad de Monterrey (UDEM)

Benjamin Izaguirre-Monsibais

Universidad de Monterrey (UDEM)

Daniel Nader-deLeon

Universidad de Monterrey (UDEM)

Erick Treviño-Carrillo

Universidad de Monterrey (UDEM)

Date Written: December 20, 2015

Abstract

The objective of this research was to identify the determinants of international reserves in Mexico. Using a Vector Error Correction Model, it was found that foreign portfolio investment has a significant positive effect on the demand for reserves both in the short run as in the long run. A decrease in the average propensity to import causes an increase in the demand for reserves in the long run, while in the short run the effect is the opposite.

On the other hand, the long-term effects of exchange rate volatility, short-term external debt and the opportunity cost on the demand for reserves are statistically significant only in the short run but not in the long run. It was concluded that the demand for international reserves in Mexico can be explained in the long run by the marginal propensity to import and indirect foreign investment, while in the short run it can be explained by the volatility of the exchange rate, the average propensity to import, short-term external debt, the opportunity cost of reserves and by monetary imbalances.

Keywords: international reserves, reserves, foreign exchange, Mexico

JEL Classification: E58, F31,F33, F41

Suggested Citation

Garza-Rodriguez, Jorge and Gonzalez-Gamez, Luis and Izaguirre-Monsibais, Benjamin and Nader-deLeon, Daniel and Treviño-Carrillo, Erick, The Determinants of the Demand for International Reserves in Mexico: A Vector Error Correction Model (December 20, 2015). Garza-Rodriguez, J. et al. (2015). The determinants of the demand for international reserves in Mexico: a vector error correction model, Journal of Advanced Studies in Finance, (Volume VI, Summer), 1(11):12-20. DOI:10.14505/jasf.v6.1(11).02.. Available at SSRN: https://ssrn.com/abstract=2706234

Jorge Garza-Rodriguez (Contact Author)

Universidad de Monterrey ( email )

venida Ignacio Morones Prieto 4500 Pte
San Pedro, 66238
Mexico

Luis Gonzalez-Gamez

Universidad de Monterrey (UDEM) ( email )

Av. Morones Prieto 4500 Pte.
Monterrey, Nuevo León 66238
Mexico

Benjamin Izaguirre-Monsibais

Universidad de Monterrey (UDEM) ( email )

Av. Morones Prieto 4500 Pte.
Monterrey, Nuevo León 66238
Mexico

Daniel Nader-deLeon

Universidad de Monterrey (UDEM) ( email )

Av. Morones Prieto 4500 Pte.
Monterrey, Nuevo León 66238
Mexico

Erick Treviño-Carrillo

Universidad de Monterrey (UDEM) ( email )

Av. Morones Prieto 4500 Pte.
Monterrey, Nuevo León 66238
Mexico

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