A Study On The Relationships Among Money Supply, Foreign Exchange Reserve And Inflation

Since the reform and opening up, China has experienced serious inflation in the early1990s and late1980s, and more moderate inflation since2006. The most recent inflation severity is less than the previous two, but also brought a lot of impact to the macroeconomic performance. Three times inflation in China to test the quantity theory of money in the mainstream economics provides a good basis of experience, in-depth understanding of the inflation mechanism behind academia and regulatory levels to grasp the key of China’s macro-economy.Based on the traditional quantity theory of money, using annual data of1990-2011years and1999-2011years of quarterly data to investigate the relationship of money supply, foreign exchange reserves and inflation. The empirical results indicate that foreign exchange reserves with the central bank monetary base, money supply between the existence of a direct impact on the relationship between monetary policy transmission process will affect the price level changes. Second, the changes in China in recent years, generalized money supply (M2) and the price level is highly correlated, both in a long-term increase in the process. Third, the control policies implemented by China in response to inflation, although efforts to adjust the larger and higher frequency, but due to consumer expectations and other factors, the effects of policies in the short term is not obvious.Overall, the quantity theory of money explain the phenomenon of inflation to a large extent, that China’s economic reality is not beyond the interpretation of the scope of the Western mainstream economics. Short term, the price level has a spiral, inflation, the current generated by the impact will have a positive impact on a few during the period of inflation, but this effect with the intensity decreasing. Changes in foreign exchange reserves amounted to generate a positive impact on inflation in the current period will show such a positive impact and sustained over time, its impact will become strong become weak. In the long run, the domestic real income changes in inflation has a negative impact. Increase in the statutory reserve ratio short-term inflationary positive impact, long-term negative influence on inflation We believe that China’s inflation since2006in the final analysis is due to excess liquidity in the market, resulting in real purchasing power of the currency decline, rising prices, specific performance, cost-push inflation. Comprehensive management of the current round of inflation, need to balance short-term and long-term policy. Should first seek the good with the combination of monetary and fiscal policy, diversification of monetary policy instruments, to take appropriate and positive fiscal policy. Secondly, the need to expand domestic demand and to take some write-off measures to mitigate the foreign exchange reserves, inflation pressure. Third, we should optimize the intermediate target of monetary policy, monetary policy is expected to model multi-pronged approach to improve the monetary policy. Finally, it should reduce the inflation pressure of fixed asset investment.