The effect if increasing Central Bank reserve with capital flows on macroeconomic indicator

Financial globalization, beginning from early years of 1980s, has affected all of the world economies. Increasing capital flows with financial liberalization, has put an upward trend on the Foreign Currency Reserves of Central Banks. Strong reserves are, in one sense, perceived as a stable tool against financial crisis, but in other sense, they are considered as narrowing down the resources that could limit the real physical investments.In this paper, financial globalization is investigated in both positive and negative ways. Moreover, the progress of capital flows beginning from 2000s and their effects on economic conjuncture are analyzed. In this analysis, the impact of the increase in Central Bank reserves on macroeconomic indicators after the year 2002 is estimated with VAR model using foreign currency reserves, money supply, GDP and inflation time series.