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.
