Research On The Relationship Between China's Foreign Exchange Reserve And Price Changes

With the economical reformation and opening up policy,the rapid development of export trade and the growth of foreign investment have led to a significant increase in China's balance of payments surplus.Thus,huge foreign exchange reserves have been accumulated.The increase in the amount of foreign exchange reserves held by the central bank will double the base currency,which will inevitably affect the domestic price level.The long-term existence of huge foreign exchange reserves makes the discussion about the relationship between foreign exchange reserves and changes in domestic prices has become the focus of academic circles,especially during the China's important strategic period.First of all,this paper analyzes the relationship between foreign exchange reserves and price changes theoretically.The conclusion which bases on the analysis of monetary quantity theory and Fisher's theoretical framework is: With the increase of foreign exchange reserves,the monetary base has been forced to increase which has doubled the money supply with the multiplication of the money multiplier.As a result,the price level rises and the inflationary pressure appears.However,declining interest rates and rising prices tend to narrow the balance of payments surplus and lead to changes in a series of economic variables such as foreign exchange reserves and basic currencies,so that it can maintain a relatively balanced state between exchange rate reserve and price level changes.Using the IS-LM model to analyze this problem after introducing the time factor,the result is:In the short term,changes in foreign exchange reserves may cause changes in the price level in the same direction.In the long run,this effect may not exist and may even play the opposite role under the action of monetary policy.Then,it selects monthly data of the amount of foreign exchange reserves,year-on-year growth rate of CPI,base currency and exchange rate from January 2010 to June 2017 and completes descriptive statistics.The preliminary conclusion is that year-on-year growth rate of CPI was affected by many of factors,of which the impact of foreign exchange reserves was particularly significant.On this basis,this paper focuses on the empirical analysis of the impact of the huge foreign exchange reserves since 2010 on the domestic price level.With the usage of vector autoregressive model,impulse response model,variance decomposition,cointegration test,Granger causality test,chromatography and other analytical methods,this paper conducts empirical test of the short-term dynamic relationship between long-term changes in foreign exchange reserves and price levels and long-term relationship,the intermediary effect of the base currency and the regulatory effect of exchange rate.The empirical results show that: from a short-term perspective,the foreign exchange reserves have a positive pull-up effect on the year-on-year growth rate of the CPI.Giving an impact on the foreign exchange reserves,the year-on-year growth rate of CPI response is in the same direction.From a long-term perspective,the foreign exchange reserves and the price index growth rate have a long-term and balanced co-integration relationship and the foreign exchange reserves have an inverse impact on the inflationary pressures on prices.In the long run,the increase in foreign exchange reserves will not increase inflationary pressures.On the contrary,it may ease inflation and even aggravate deflationary pressures.Mediation effect test shows that the amount of foreign exchange reserves is the Granger reason for the base currency and the year-on-year growth rate of CPI in the short run.The amount of foreign exchange reserves affected the year-on-year growth rate of CPI by influencing the base currency.It is found by the regression analysis of the regressions that in the long run the impact of foreign exchange reserves on price growth is different under different exchange rates.The Regulation effect test brought by the increase of foreign exchange reserves on the domestic market will be mitigated with the devaluation of local currency.The theoretical and empirical analysis show that the increase of the foreign exchange reserves not only causes the domestic inflation but also the deflation.In order to solve this problem,government should take a series of measures to control the foreign exchange reserves on a proper scale,improve the effectiveness of monetary policy in the short term,effectively curb deflation and stabilize prices in the long term.Based on the analysis,this paper mainly put forward some suggestions for improving the management of foreign exchange reserves,perfecting the foreign exchange cancellation system and promoting the reform of the exchange rate system.