The Relationship Between The Counterpart Of Foreign Exchange Reserves And The Inflation From The Perspective Of Quantity Theory Of Money

Along with China's trade surplus for a long time after joining the WTO, China has formed a large-scale foreign exchange reserves. Mandatory exchange settlement system, which in order to ensure the basic stability of the exchange rate, results in a huge amount of foreign exchange which passively issued by the central bank. Due to the lack of effective sterilization methods, a large number of base money is issued, causes excess liquidity and leads to the phenomenon of inflation. Analyzing the relationship between foreign exchange and inflation has important theoretical significance and practical guidance value in reforming China's foreign exchange system and regulating macroeconomic.Through the classical quantity theory of money, Keynesian monetary theory, Friedman's quantity theory of money, the new analysis and Marx's theory of money, we can see the relationship between the quantity of money and inflation have revealed a fundamental law-- In the paper money standard, the increase of the amount of money supply will inevitably lead to a rise in the general price level, of course, the proportion of the increased price is not strictly equal to the rate of increase in money supply. Therefore, as Friedman puts it:"Whenever and wherever, inflation is essentially just a monetary phenomenon." Based on this perspective, we can find that in the current foreign exchange management system, the increase of foreign exchange reserves will inevitably lead to an increase in foreign exchange by analyzing the relationship between foreign exchange and inflation. The effect of foreign exchange is extremely limited due to the unity and unsustainability of the central bank's sterilization methods. Under the money multiplier effect, additional base currency sharply enlarges resulting in excess liquidity in the community and inflation. Then the paper testifies the impact of foreign exchange on the inflation by taking advantage of China's relevant empirical measurement of economic data.Finally, the paper based on China's current foreign exchange system reform and reducing inflationary pressures to make related policy recommendations. First of all, in order to achieve an international balance of payments, we should change the way of economy development. Secondly, the government should deepen foreign exchange reform and change the mandatory exchange settlement system to let the people contain the foreign exchange. Thirdly, the government should rich Central Bank foreign exchange sterilization means to enhance the effect of foreign exchange sterilization. At last, we should use foreign exchange reserves rationally and peruse economic development and social progress.