Empirical Research On The Impact Of Money Supply Of China's Foreign Exchange Reserves

In the open economy, foreign exchange reserve and its variation which has become the link point between the policy of local and foreign currency is the result of the run of balance of payment and forms restrictions on the implement of monetary policy. Based on the theory of endogenous money and monetary policy in the open economy, in the frame of present foreign exchange management system and foreign exchange policy in China, the most direct impact of foreign exchange reserve and its variation on monetary policy is about money supply, including its quantity, structure, time lag and the effect of its regulation.Based on the analysis of the mechanism by which the foreign exchange reserve influences all aspects of money supply, and using methods of econometrics such as cointegration theory and vector autoregression(VAR) model, this paper makes out empirical research on the data since the year of 1994 when the reform of foreign exchange management system was taken place in China and then proves that firstly, foreign exchange reserve has obviously positive impact on money base and money multiplier which determines the quantity of money supply, and this kind of impact bears persistency and stability; secondly, the variation of foreign exchange reserve has changed the structure of money base put into the economy, restricted the space in which central bank makes operation of monetary policy, and influenced money supply of different layers to different extent; thirdly, the time lag of the effect of position for forex purchase on money supply is shorter than that of domestic credits, and the more the proportion of position for forex purchase to money supply, the shorter the time lag of money supply is. Meanwhile, according to this kind of impact, foreign exchange reserve has notable positive effect on inflation rate and premium rate of realexchange rate and brings pressures on inflation as well as fluctuation of exchange rate, thus the effect of money supply regulation is restrained.Therefore, the impact of foreign exchange reserve on money supply reveals the endogenesis of money supply in China, enhances the contradiction between policy of local and foreign currency, and increase the difficulty of regulation of money supply. In recent years, this status has been sharpened by the supemormal increase of foreign exchange reserve, so it is needed to be solved by regulating balance of payment, reforming foreign exchange management system further, and developing open market operation, etc.