The Impact of Consumer Price Index on Foreign Exchange Reserves of Afghanistan

Abstract

The Foreign Exchange Reserves (FERs) are important tool and source of
financing for the state of national development used for balance of payment
and maintains in foreign currencies by the central bank of Afghanistan. In
addition, Inflation is measured by Consumer Price Index (CPI) is the change
in price of a basket of goods and services bought by a group of households.
This study investigated the impact of CPI on foreign exchange reserves of
Afghanistan and used regression model. The time series data was collected
from the International Monetary Fund (IMF) website and is monthly (2014–
2020). Moreover, the data was normalized by using Log. The results
indicate that CPI has a negative association with FERs in Afghanistan as
CPI increases, FER decreases and vice versa. The government may improve
FERs while boosting the country's economy and may consider different
strategies to monitor inflation.