Exchange Rate and Reserves in Asian Countries: Causality Test.

Countries hold foreign currency reserves to support and influence exchange rate. This paper examines the causal relationship between exchange rate and reserves in six Asian countries. We obtain divergent evidence regarding the long-run and stable relationship between reserves and exchange rate in the sample countries. There is evidence of bidirectional causality between reserves and exchange rate in India, while no-causality in Bangladesh. There is unidirectional causality from reserves to exchange rate in Pakistan, Sri Lanka and Thailand and unidirectional causality from exchange rate to reserves in Philippines. It is concluded that holding of reserves is necessary for supporting exchange rate and vice versa. [ABSTRACT FROM AUTHOR]