The Demand For International Reserves Based On The Behalf Of The Perpetrator Model Intertemporal Equilibrium Analysis

Up to February 2008, China's international reserve has exceeded 1600 billions dollar. The rapid international reserve growth not only increases national wealth, but also brings unexpected challenge to domestic economy, such as liquidity surplus, assets bubble and inflation. How much international reserve do we need? That is one of the problems China's government mostly concerns. As we all know, the traditional international reserve theories can not explain nowadays rapid growth of many countries' international reserve, especially the emerging market countries. The purpose of the paper is to formulate an inter-temporal equilibrium representative agent model which analyze the transaction motivation, precautionary motivation and neo-mercantile motivation into one frame, then estimate the optimal international reserve by calibration.The paper is organized as following: firstly, three kinds of international demand motivation are introduced including the transaction motivation, precautionary motivation and mercantile motivation. Based on the three kinds of motivation of international reserve demand, we analyze the general characteristics of the international reserves, and distinguish remarkable difference between the international reserves coming from the current account and the capital and financial account which become a start of our research. Secondly, we formulate a representative model based on the output shock and an inter-temporal equilibrium representative model explaining the three kinds of international reserves motivation including the neo-mercantilist motivation, and get the general solution of the equilibrium international reserves; thirdly, we also use the empirical study to analyze different international demand characteristics between the developed countries and the emerging market countries, which approves the results of the theoretic models. At last, we use the calibration to estimate China's international reserves and analyze the international reserves surplus quantitatively, which give a support for the policy implication of our paper.Chapter 1 explains the problem that our research focused on, the methods adopted and the purpose as well as the innovation and theoretic logic, and makes a survey on the related literatures. Besides, we also emphasized remarkable difference between the international reserves demand from the current account and the capital account and make the classification of the international reserves motivation. Chapter 2 and Chapter 3 formulate a representative equilibrium model based on the output shock and an inter-temporal representative model explaining three motivations of international reserves including the neo-mercantilist representatively, which make the theoretic analysis on the international reserves. Chapter 4 further researches the difference international demand structure and motivations of different countries based on the reality data. From the comparison, we summarized the international reserves demand characteristics of the single country in different developed phases and the different countries on the same time. Chapter 5 gives the empirical study based the analysis in the former chapters. The empirical study approved that: the international demand of developed countries is related with the private consumption and the government expenditure, and has no significant relationship with the domestic unemployment and the current account surplus. On the contrary, the international reserves demand of the emerging market countries is only related with the current account surplus, and has no relationship with the domestic unemployment, private consumption and the government expenditure. Chapter 6 makes a calibration of China's international reserves based on the research results of Chapter 2 and Chapter3. The calibration of the model from Chapter 2 finds China's initiative international demand should be 6% of GDP. But China's international reserve at the end of 2007 is equal to the 40% of GDP in reality. Therefore, the representative model based on the output shock can explain the 12% of China's international reserve holdings. Further, we use the analysis results from the Chapter 3 to make the calibration of China's international reserves. The calibration find: the optimal international reserve at end of 2007 should be 839.05 billion dollar. In fact, the actual holdings of China's international reserves at that time are 1532.324 billion dollar. The surplus demand accounts for 45.24% of the total reserves. Chapter 7 analyzes and explains the rapid growth of China's international reserves demand and source of the surplus reserves upon the research results of Chapter 6 and the characteristics of China's international reserves growth. Chapter 8 gives the conclusion and the policy implications.