Research On Inflation Effect Of Foreign Exchange Reserve Increase And Effectiveness Of Monetary Sterilization By Central Bank Bills In China

Since2002, China’s international balance of payments appeared a sustained surplus, and at the same time, China has accumulated huge foreign exchange reserves. At the beginning of2000, China’s foreign exchange reserves amounted to$156.1billion which has reached875.1billion at the end of March2006and China surpassed Japan as the country who has the largest foreign exchange reserves in the word. Till to2001, the number exceeds$3trillion, an increase of approximately10-fold compared with2002.At the end of2012, the number was only$3.31trillion, the grow rate was less than the former year by74%and it was also the lowest one from2004,China’s foreign exchange reserves appeared a turning point.Such massive foreign exchange reserves forms a large amount of counterpart of foreign exchange reserves, which leads to an increase in the base money and the total money supply in the market, it further results in inflationary pressures.This paper is based on the real situation on the foreign exchange reserves, show how it produce an impact on inflation. At the beginning, I will introduce the scale of foreign exchange reserves over the years and causes:the increase of the counterpart of foreign exchange reserves caused by the increase in foreign exchange reserves, the central bank was forced to put the base money which under the effect of the money multiplier makes an increase money supply in the entire society, social needs expand and resulting in upward pressure on prices.After that, I analyzed the transmission mechanism of foreign exchange reserves to inflation, including the analysis based on the central bank’s balance sheet and the quantity theory of money, to state the foreign exchange reserves have the inflation effect.Subsequently, from an empirical point of view, this article studied the inflation effect of China’s foreign exchange reserves and the effectiveness of central bank’s bills sterilized intervention.Finally, aimed at China’s actual situation, this paper forward a number of policy recommendations which may can make contribution to the academic research and practical operations.This paper used some theoretical models and the combination of qualitative and quantitative analysis method to study the followed two problems, one is the relationship between the foreign exchange reserves and inflation, the other one is the effectiveness of the central bank’s bills sterilized intervention.