www.ccsenet.org/ijef International Journal of Economics and Finance Vol. 4, No. 3; March 2012 Published by Canadian Center of Science and Education 21 Foreign Exchange Reserves in Asia and Its Impact on Import Demand Augustine C. Arize College of Business and Technology Texas A&M University-Commerce Commerce, Texas 75429, USA Tel: 1-903-886-5691 E-mail: Chuck_Arize@tamu-commerce.edu John Malindretos Cotsakos College of Business William Paterson University Wayne, NJ 03013, USA Received: December 5, 2011 Accepted: January13, 2012 Published: March 1, 2012 doi:10.5539/ijef.v4n3p21 URL: http://dx.doi.org/10.5539/ijef.v4n3p21 The authors would like to thank Allan Headley, Ed Manton, Don English, and Harold Langford for helpful comments on several earlier drafts. Special thanks to Kathleen Smith and PatcharapornSangluafor excellent research assistance. This research is funded by a GSRF-TAMU-C grant. Abstract Some Asian countries have experienced increases in the level of their foreign exchange reserves as well as increases in their import volume. Theory suggests that as the level of exchange reserves increases, it may affect the demand for imports since more funds will be available for imports. In this paper, we employ quarterly data of five Asian countries and test the null hypothesis that the import demand behavior in India, Japan, Korea, Singapore and Thailand are not determined by real income, relative import price and foreign exchange reserves. The empirical analysis of import demand behavior is presented using the dynamic error-correction model, which allows an explicit parameterized division of effects into long-run influences, short-term adjustment and error-correction term. It uses econometric techniques organized around Johansen, Harris-Inder, and Hansen Lccointegration analyses; fully modified OLS, dynamic OLS and ARDL to estimate long-and-short run demand elasticities. Keyword: Import demand, Foreign exchange reserves, Cointegration JEL: D53, E44 1. Introduction Over the past one and half decades, Asian economies have exhibited the most noticeable increase in foreign exchange reserves as well as increases in their import volume. For example, besides China, Japan leads the world in foreign reserve ranking with over $1 trillion in 2010. The foreign reserves (rank) for India, Korea, Singapore and Thailand are $287 billion (8 th ), $295 billion (6 th ), $226 billion (11 th ) and $176 billion (13 th ), respectively. 1 The sources of these reserves have been export earnings, remittances of Asians residing abroad, and in few cases, foreign assistance. As a consequence, in the period 1973 - 2010, imports by these countries grew at a higher rate. Imports averaged 18.88, 4.83, 12.20, 7.15 and 14.25 percent per year in India, Japan, Korea, Singapore and Thailand, respectively, and the variation in imports has been large and wide with the coefficient of variation ranging from a high of 1.64 in India to a low of 0.44 in Japan. Foreign reserves play an important role in the design and evaluation of current and future macro policies aimed at achieving the trade balance. In countries with fixed or partially flexible exchange rates, the reserves are mainly used to maintain competitiveness of the tradable sectors. They achieve this by preventing the appreciation of their currencies and by keeping the exchange rate at or close to the official target level. Beyond exchange rate stabilization, foreign reserves are generally viewed as indicators of the strength of an economy, especially in particular itsexporting industries. From a policy perspective, foreign reserves influence trade policies. A high level