A Study On The Financial Stability Demand For The Foreign Exchange Reserves From The Perspective Of International Spillovers Of Monetary Policy

Under the open economy,international spillovers of monetary policy of major advanced economies cannot be ignored.Against the background of the overheated economic recovery since the 2008 global financial crisis,advanced economies have gradually withdrawn from quantitative easing phase and successively initiated the normalization of monetary policy in recent years.By the end of 2018,the Fed has raised interest rate 9 times and its target federal funds rate has been within the range of 2.25%-2.50%.The interest rate increase cycle coincides with the tough stage of China's economic restructuring and industrial structure upgrading.For the monetary authorities,to cope with interest rate increase cycle,maintain financial stability thus to promote the steady development of the real economy,an adequate level of the foreign exchange reserves is indispensable.At the same time,from the perspective of the international spillovers of domestic monetary policy,the financial stability demand for the foreign exchange reserves is also closely related to the degree of internationalization of the local currency.Since the launch of the strategy of RMB internationalization from 2009,RMB's function as a reserve currency has gradually emerged and the demand for RMB reserves has gradually increased.Accordingly,China's foreign exchange reserves are also facing a dynamic adjustment process of continual convergence to the optimal level.Therefore,studying the financial stability demand for the foreign exchange reserves from the perspective of monetary policy spillovers has become a research issue worthy of further discussion in the field of international finance and monetary policy.Chapter 3 firstly calculates the financial stability demand of China's foreign exchange reserves,then chapter 4 constructs a theoretical model on the financial stability demand for the the foreign exchange reserves from the perspective of monetary policy spillovers,and studies the overall impact of the normalization of monetary policy of advanced economies marked by interest rate increases on China's finance and economy and the dynamic adjustment process of foreign exchange reserve demand.The study finds that,facing unexpected temporary interest rate increase shock,fixed exchange rate arrangement through forex intervention can attain exchange rate target,makes Taylor rule better positioned to stabilize financial environment and reduces output volatility in the short run,and thus is better than other alternatives;while in the long run,when facing persistent interest rate increase shock,managed floating exchange rate arrangement through forex intervention can adjust exchange rate floating range in a "leaning against the wind" style under the monetary authority's discretion with much less welfare loss in terms of real economy as well as financial volatilities compared with other alternatives,thus can be an optimal policy alternative for China during its gradual opening up of capital account and currency internationalization.With the dynamic trade-off of different kinds of exchange rate arrangements,the demand for the foreign exchange reserves also faces its corresponding dynamic adjustment process.Chapter 5 further empirically examines the relationship between the monetary policy spillovers of advanced economies and the level of foreign exchange reserves in other economies.It finds that the monetary policy of US dollar,euro,pound and Japanese yen in the SDR currency basket have distinct spillovers on the level of foreign exchange reserves of other economies.Chapter 6 further studies the dynamic transition of foreign exchange reserve demand factors and the optimization effect of the internationalization of the local currency on the level of a country's foreign exchange reserves from the perspective of domestic monetary policy spillovers.It finds that the financial stability motive currently has a greater explaining power than the traditional import transaction demand for the foreign exchange reserves;the higher the degree of internationalization of a country's currency,the less the reserves demand for financial stability motives;the reserve level of non-international currency issuers experiences a transition from import transaction demand to financial stability demand during 1994-2001;while the level of the international currency issuers' foreign exchange reserves are mainly driven by financial stability factors.Before and after the financial crisises,the financial stability driving force of foreign exchange reserves becomes more distinct.Chapter 7 makes a wrap-up of research conclusions.