The Study On The Relation Between Foreign Exchange Reserves And Inflation In Our Country

The trade in China has been surged recently, which accumulate large amount of foreign exchange reserves. At the same, the inflation has also become seriously for some reasons. Lots of scholars think the high foreign exchange reserves result from the center bank put too much money into circulation, and CPI which runs higher lead to the inflation. The foreign exchange reserves might have some relations with CPI. In this article, I use monthly data from 2008.1 to 2010.12, and the three variables are FER, CPI and M0, to find out the relation between FER and CPI.After the consideration, I use EG co-integration test to check Granger causality relation. There exists co-integration between MO and CPI. FER and M0 also exists this relation,but CPI and FER do not exists the relation. FER can cause CPI and M0, and MO can cause CPI, however other granger relations do not exist. As a result, we know that foreign exchange reserves can cause inflation, and the effection between foreign exchange reserves and M0 is bigger. At last, I put up three policies. We should manager foreign exchange reserves flexible, decrease the amount and command MO by currency policies.