Research In The Scale Of Foreign Exchange Reserve From The Perspective Of Currency Internationalization

Since the21st century, along with the rapid development of the economicglobalization and financial liberalization, the world economy has entered a new periodof tightly linked and rapid development. Countries acclimate with the tide, seizing theopportunity to build up their economies, but at the same time, they also face variousrisks, especially financial risks. Nowadays, the scale of global foreign exchangereserve which reaches more than8trillion dollars, plays an important role in theprevention of financial risks, and stability of the international financial environment,which attracts world’s attention.In those countries, with sufficient foreign exchange reserve, not only theconvertibility of national currency, but also the exchange rate stability has beenenhanced. Sufficient foreign exchange reserve provides powerful support andguarantee for its currency moved towards the internationalization. So we may have towonder: Conversely, a country’s currency internationalization might interfere the scaleof foreign exchange reserve? According to the monetary theory of the balance ofpayments, huge international exchange reserve has been built up when faced thebalance-of-payments pressures. This theory also suggested that the size ofinternational reserve is determined by the money supply and the share of reserve. Andwe all know foreign exchange reserve is the most important part of the internationalreserve. So, we can speculate that foreign exchange reserve is closely related tomoney supply and its currency cosmopolitanism, suggesting that investigation offoreign exchange reserve from the perspective of monetary internationalization ismeaningful.In recent years, the demand of foreign exchange reserve gradually become thebalance between costs and returns of holding reserve. Therefore, this thesis mainlystudies the scale of foreign exchange reserve from the perspective of theinternationalization of currency. Considering the relationship of foreign exchangereserve and macro-economic fundamentals, I introduce the indexes which representinternationalization of currency, money supply and the strength of a country’seconomy, to expend the buffer stock model of foreign exchange reserve.The main framework of my research of the scale of foreign exchange reserve from the perspective of the internationalization of currency is as follows: First，brieflyexposit the relevant theories regarded to the scale of foreign exchange reserve. Andthe function of reserve and the main factors affecting the scale of reserve is analyzed.Secondly, the definition of currency internationalization should be the process that thecurrency of a country enters in the international currency circulation field, widelyrecognized as valuation, transaction settlement and international reserves, exercisesthe function of international currency. Three important indexes are selected toconstruct a simple model to measure the internationalization of a country’s currency.Finally, I analyze the actual effect of the size of foreign exchange reserve based on theimproved buffer stock model. Here, I collected the panel data of12countries from2003to2013, and made an empirical test on the scale of foreign exchange reservechanges. The empirical results denote that currency internationalization and foreignexchange reserve have positive correlation. So some studies mentioned that thecurrency internationalization can alleviate the negative effects of the large scale offoreign exchange reserve cannot be well explained in this empirical study. Otherfactors work when determining a country’s foreign exchange reserves scale. So, thispaper also analyzes the effect of the economy strength, cost of holding foreignexchange reserve and the adjustment cost of holding foreign exchange reserve on thescale of foreign exchange reserve.