Impact of Foreign Exchange Reserve on Exchange Rate in Selected South Asian Economies

Abstract

The significance of exchange rate and its influence on the economic stability, productiveness, and trade patterns. Our study is the first in Selected South Asian Association for Regional Corporation (SAARC) countries including Bangladesh, India, Nepal, Pakistan, and Sri Lanka. We used four methods of estimation of panel data like Generalized Method of Moment (GMM), Fixed Effect (FE), Pooled Ordinary Least Square (POLS), and Random Effect (RE). The Hausman test preferred the fixed effect instead of the random effect. This study aims to examine the effect of foreign exchange reserve on exhange rate over the period of 2000 to 2020. The concept of exchange rate is also essential to government operations. Our study also adds to previous literature by discussing and testing the impact of foreign exchange reserve on exchange rate. According to estimated results, real gross domestic product, foreign exchange reserve, and openness of trade all have a significant impact on exhange rate over the time span under consideration. Whereas money supply and terms of trade both have an insignificant impact on exchange rate. Our finding confirms that the effect of foreign exchange reserve on exchange rate has a substantial and pessimistic. The empirical findings of the paper are of great significance for macroeconomic markets. Findings are also conducive to the countries’ exports and domestic resources over time, which will result in an increase in foreign exchange reserves. In the end, exchange rate is essential  for understanding and implementing broader macro and financial economic policymakers. Consequently, stabilizing the exchange rate requires boosting foreign exchange reserves.