The Impact of Foreign Reserves on the Real Growth Function of Jamaica (1992-2011) Using Vector Auto Regressive Model, Granger Causality Test and Co-Integration Analysis

The paper examines the short-run and the long-run impacts of net international reserves on the real gross domestic product of Jamaica from 1990 to 2011. The variables used in this study are the logarithms of exchange rate, imports, foreign reserves, government capital expenditure, real gross domestic product and exports. The research shows that unidirectional relationships exist between RGDP (real GDP), IMPTS (imports), FORS (foreign reserves) and EXCH (exchange rate) and that there is a long run relationship among the variables in the study. The VAR analysis also establishes that shocks to the logarithm of IMPTS contribute the highest amount of shocks to the real GDP function; and that shocks to foreign reserves also contribute the greatest amounts of shocks to imports on the one hand; while shocks to exchange rate contribute the greatest amount of shocks to real GDP on the other. This indicates that the government of Jamaica has to consider the movements in the exchange rate, imports and foreign reserves at impacting the level of the real GDP