The Impact Analysis Of Foreign Exchange Reserve On China's Monetary Policy

Since the reform of the China's foreign exchange system from 1994, our foreign exchange reserves have maintained sustainable and rapid growth. As the link point between domestic financial policies and external financial policies, foreign exchange reserve and its variation not only becomes one of the key indicators of the policy of local and foreign currency, but also becomes one of the important factors which affect the monetary policy autonomy and the effectiveness.This paper studies effects of the China's sustainable growth of foreign exchange reserves on the monetary policy. Moreover the whole paper is divided into four chapters. To begin with, Chapter One analyzes the issues of the sustainable growth of China's foreign reserves and its effects on the monetary policy operations. The analysis says that the continuous growth of China's foreign reserves is closely connected with China's fast economic growth, China's continuing pattern of double surplus and China's existing system of foreign exchange settlement and sales and value of foreign exchange. And also its tendency is hard to reverse in the short term. The sustainable growth of foreign reserves results in the domestic excessive liquidity and brings a series of risks into China's economy and monetary policy. Furthermore, Chapter Two analyzes the impacts of the foreign exchange reserves mechanism on the monetary policy form the respective of theory. The analysis shows that the sustainable growth of China's foreign exchange reserves have brought a series of impacts on the monetary policy, which changes the basic money supply, weakens the autonomy of monetary policy, strengths the endogenous character of the money supply, shortens time lag of money supply, influences the central bank's ability to regulate and control economy and brings the three-pronged dilemma. Moreover, Chapter Three analyzes the effects of the foreign reserve on the money supply empirically through the cointegration theory and vector autoregression model. The empirical results show that foreign reserve has significant positive effects on the money supply and indirect effects on money supply through asset price mechanism. Meanwhile, it can shorten the time lag of money supply. At last, Chapter Four analyzes the tendency of monetary policy and measures. At the background of continued growth of foreign exchange reserves, on the one hand, the tendency of monetary policy should be appropriately tightened; on the other hand, it should inhibit the excessive liquidity and control the inflation. Besides, many measures should include the reform of the foreign exchange system, financial system and economic structure in order to alleviate the predicament and risk, arisen by the sustainable growth of foreign reserves, to the monetary policy. Only by this can the China's economy develop well and fast.