Accumulation of international reserves and economic growth in the west African monetary zone

Abstract

This study mainly sought to find out (i) the factors that have influenced the demand for international reserves in the WAMZ (ii) the effect of international reserves accumulation on economic growth and (iii) whether there is a threshold effect in the international reserves-economic growth nexus. Using quarterly data from 1984 to 2009, it adopted both the parametric and non-parametric estimation methods. The results indicated that the mercantilist motives as well as the precautionary motives are the main drivers in the long run. Furthermore, the results confirmed the validity of Mrs. Machlup Wardrobe and the related Joneses argument, the monetary approach to balance of payments as well as the threshold effect in the demand for international reserves. Finally, the results indicated that there is a positive long run relationship between economic growth and international reserves for all the five countries meaning that accumulation of international reserves promotes economic growth and that there exists a threshold effect in the economic growth-international reserves nexus. A U-shaped relationship between economic growth and international reserves was established, a result which is quite new to the literature on economic growth and international reserves. To reduce the impact of a crisis and increase export competiveness, it is recommended that the monetary authorities of WAMZ hold significant number of reserves. It is also, recommended that international reserves be used as a tool to promote economic growth in the West African Monetary Zone.