Credit Growth And Foreign Reserve Paradox Does Change In Credit Growth Impact Foreign Reserve

This thesis explains the nature of movement in foreign reserves from changes in domestic credit.The contributions of this thesis adds to new knowledge in monetary policy arena,in particular for Pacific Island nations.Findings of this research is useful in monetary policy transmission mechanisms used by central banks.The research is based on bank lending channel used by central banks in execution of monetary policy.Monthly domestic credit and foreign reserve data from 1980 to 2015 for Fiji was plotted together.The plot revealed a periodic pattern between domestic credit growth and foreign reserve.Based on periodic pattern depicted by graph,the thesis utilised Fourier Transformation technique and explained relationship between foreign reserves and domestic credit.The model developed in this work shows that changes in domesitic credit will cause movements in foreign reserve.The model shows that an increase in domestic credit would lead to an increase in foreign reserve.This is contrary to research hypotheses.The research hypotheses states that an increase in domestic credit will lead to a decrease in foreign reserves.In this research,there is also a discussion of components of domestic credit and money supply.Increase or decrease in domestic credit leads to changes in money supply,which would then impact price level in the country.This is explained further in this thesis with Quantity Theory of Money.Hence,it is important that the policy makers utilise model developed in this research to target optimal level of domestic credit.This piece of work will be of interest to anyone having interest in monetary policy research and this would be very useful for monetary economist in South Pacific.