Dundee Discussion Papers in Economics 203: Fluctuation in the international currency reserves of less developed countries: HIPC vs non-HIPC

This paper uses the principles of the monetary approach model of balance of payments and exchange market pressure to analyze the fluctuations in the international reserves of LDCs. The motivation for this analysis derives from the recent emphasis of the debt reduction policies that target the HIPCs. These policies stress the importance of non-monetary, and to some extent non-economic factors such as institutional improvements, good governance, infrastructural development and poverty reduction strategies. The argument is that once such reforms are implemented effectively, the economic forces will work in the right direction enabling the HIPCs to sustain a healthy balance of payments. We use panel data analysis to examine whether there is a significant difference between international reserves fluctuations in the HIPCs and in the rest of the LDCs. Evidence from data over the period 1983–2003 for 47 LDCs - of which 20 qualify as HIPCs by the IMF-World Bank criteria - suggests that there are significant differences in the way the reserve flows respond to their main determinants in the two sets of countries. This begs the question of whether the above mentioned policies can alleviate the causes of such differences.