Research On Inflation Effect Of Foreign Exchange Reserve Increase And Effectiveness Of Monetary Sterilization Policy In China

When it comes to 2Q 2008, inflation ration has slowed down and deflation is strongly expected because of the subprime crisis. However, the last inflation phenomenon still needs further study on both origin and influence channel. Along with the continued trade surplus, foreign exchange reserve increase quickly, which leads central bank to buy in large sum of foreign exchange and sell out basic money, which in turn multiply the monetary supply. Excess liquidity gives big pressure on inflation effect. From 2Q 2002, with the push of both domestic and foreign effects, the trade surplus situation worsen and FDI increases year by year which bring no less than 200 billion dollars to foreign exchange reserve. Until Jun 2008, Chinese foreign exchange reserve has summed up to 1.8 trillion dollars. Trade surplus under trading and capital account causes sharp inflow of foreign exchange, which leads to use RMB to buy in foreign exchange, which in turn basic money multiplies. This is a dilemma and becomes the major problem for the monetary authority.At the same time, CPI increases from 2002. Especially after 2007, every price index is in an increase trend. And when it comes to 1Q 2008, CPI remains on 7%, inflation pressure goes up. From the history time series data, CPI is not a simple function of foreign exchange. In certain years when the increase rate of foreign exchange was high, CPI on the contrary slowed down. Is there any effect on the price change from foreign exchange reserve increase? What is the influence? From what channel the influence comes out? Is there any policy obstacle on the influence channel? Can this policy be sustainable? These are the main study destination and purpose.The first half mainly discuses the inflation effect of foreign exchange reserve increase. From both theoretical and empirical research, the essay finds the conduct mechanism of this effect and the inflation effect is not so significant and foreign exchange reserve increase is not the only reason which leads to inflation. There are else influence effects which include foreign exchange sterilization. It is foreign exchange sterilization which leads to the assurance of the inflation pressure from the excess liquidity.The second half mainly researches on the effectiveness of the foreign exchange sterilization. Empirical research illustrates that foreign exchange sterilization has effect on inflation effect. But it is not so efficient. The last part focuses on how to improve the sterilization policy and other assurance policy on inflation effect from foreign exchange reserve increase.