How Trade War Shocks Shape Reserve Accumulation? Evidence from MENA Countries
DOI:
https://doi.org/10.37385/ijedr.v6i6.9829Keywords:
Foreign Exchange Rate, Trade War, Exchange Rate Volatility, Financial DepthAbstract
The study examines the effects of trade war tensions, exchange rate volatility, and financial depth on foreign exchange reserves in 14 MENA countries from 2000 to 2024. Using the Panel Vector Error Correction Model (PVECM), the analysis captures both short-run dynamics and long-run equilibrium relationships. Stationarity and cointegration tests confirm that all variables are integrated at the I(1) level and exhibit a stable long-term relationship. The PVECM results show that none of the key variables significantly affect FER in the short term. In the long term, however, TWI demonstrates a positive and significant impact, indicating that prolonged global trade tensions encourage MENA countries to increase reserve accumulation as a precautionary response to external uncertainty. Conversely, FD exerts a negative and significant long-term effect, suggesting that deeper financial markets may reduce reserve holdings through greater foreign currency demand and increased financial openness. Meanwhile, ERV shows a negative long-term relationship with FER but lacks statistical significance in either the long or short term, indicating that exchange rate fluctuations do not directly drive reserve adjustment behavior in MENA economies. These findings highlight the importance for policymakers to strengthen external resilience and manage financial sector development carefully to ensure foreign exchange reserve stability amid intensifying global geopolitical tensions.
Keywords: Foreign Exchange Rate, Trade War, Exchange Rate Volatility, Financial Depth
References
Apaitan, T., Luangaram, P., & Manopimoke, P. (2022). Uncertainty in an emerging market economy: Evidence from Thailand. Empirical Economics, 62(3), 933–989. https://doi.org/10.1007/s00181-021-02054-y
Ben-Bassat, A., & Gottlieb, D. (1992). Optimal international reserves and sovereign risk. Journal of International Economics, 33(3), 345–362. https://doi.org/10.1016/0022-1996(92)90008-8
Benigno, G., Fornaro, L., & Wolf, M. (2022). Reserve accumulation, growth and financial crises. Journal of International Economics, 139, 103660. https://doi.org/10.1016/j.jinteco.2022.103660
Creswell, J. W. (2018). Research design: Qualitative, quantitative, and mixed-method approaches. SAGE Publications.
CRS. (2018). China-U.S. trade issues. Congressional Research Service.
Cui, L., & Jiang, Y. (2025). Quantitative analysis of the U.S. chip embargo and China’s export controls on GaGe and graphite. Computers & Industrial Engineering, 200, 110860. https://doi.org/10.1016/j.cie.2025.110860
Dominguez, K. M. E. (2012). Foreign reserve management during the global financial crisis. Journal of International Money and Finance, 31(8), 2017–2037. https://doi.org/10.1016/j.jimonfin.2012.05.008
Fajgelbaum, P., & Khandelwal, A. (2021). The economic impacts of the US-China trade war. National Bureau of Economic Research. https://doi.org/10.1146/annurev-economics-051420-110410
Frenkel, J. A., & Jovanovic, B. (1981). Optimal international reserves: A stochastic framework. The Economic Journal, 91(362), 507–514. https://doi.org/10.2307/2232599
Gilal, A. A., & Ismail, N. A. (2025). Economic policy uncertainty and foreign reserves: Empirical evidence from BRIC countries. International Journal of Economics and Business Administration, 23(2), 3–23.
Gurría, A., Azevêdo, R., & Kituyi, M. (2019). Report on G20 trade measures (Mid-October 2018 to Mid-May 2019) (Vol. 1). WTO, UNCTAD, OECD.
Hamdani, M., & Belfencha, I. (2024). Strategic implications of the US-China semiconductor rivalry. Discover Global Society. https://doi.org/10.1007/s44282-024-00081-5
Heller, H. R. (1966). Optimal international reserves. The Economic Journal, 76(302), 296–311. https://doi.org/10.2307/2229716
Kaveh-Yazdy, F. (2023). Economic policy uncertainty: A review on applications and measurement methods with focus on text mining methods. Yazd University.
Mumtaz, H., & Ruch, F. U. (2025). Policy uncertainty and aggregate fluctuations: Evidence from emerging and developed economies. [Journal name missing], 00(0), 1–22.
Pratama, R. Y., Riyanto, W. H., Hidayat, R., & Info, A. (2025). Model of unemployment rate using PVECM approach in East Java cities. Jurnal Ekonomi Pembangunan, 23(1), 109–121. https://doi.org/10.22219/jep.v23i01.41005
Rath, B. N. (2025). Determinants of gross international reserves in the case of the Maldives. International Journal of Islamic and Middle Eastern Finance and Management, 18(6), 1315–1330. https://doi.org/10.1108/IMEFM-02-2025-0136
Sanyal, A. (2025). Caught in the crossfire: How trade policy uncertainty impacts global trade. International Economics, 184, 100621. https://doi.org/10.1016/j.inteco.2025.100621
Sekaran, U., & Bougie, R. (2016). Research methods for business. Wiley.
Shrivastava, M., & Jash, A. (2025). China’s semiconductor conundrum: Understanding US export controls and their efficacy. Cogent Social Sciences, 11(1). https://doi.org/10.1080/23311886.2025.2528450
Umoru, D., Ugbaka, M. A., Atseye, A. F., Uyang, F. A., Abanbeshie, J., Omono, C. E., Takon, S. M., Omoluabi, E. T., Igbinovia, B., Ojikpong, C. E., Ushie, E. A., Bassey, C. E., Bisong, H. E., Bisong, B. D., Henshaw, V. E., & Odigbo, B. E. (2025). Foreign exchange reserves accumulation in selected countries within a regulatory framework. Journal of Governance and Regulation, 14(3), 49–61. https://doi.org/10.22495/jgrv14i3art5
Wang, M., Nor, N. M., Rahim, N. A., & Khan, F. (2025). Trade policy uncertainty and corporate financialization: Strategic implications for non-financial firms in China. Cogent Economics & Finance, 13(1). https://doi.org/10.1080/23322039.2025.2460078
Widarjono, A. (2023). Aplikasi ekonometrika untuk penelitian keuangan Islam. UPP STIM YKPN.
Zhang, X. (2020). The global economic and trade impact of the U.S.-China trade war 2018–2020 (Master’s thesis). Erasmus University Rotterdam.
