The Analysis Of Foreign Exchange Reserve And Money Supply

Along with the coming of financial storm in Sep. 2008. The whole world economy is coming into the recession period. Although the foreign exchange reserve in China did not suffer a big loss during the financial crisis, the increased rate has been lowed down. Until Jan. 2009, the foreign exchange reserve had excessed 1.95 trillion dollar. From 2002, as the persistence of trade and capital surplus, the foreign exchange reserve accumulated rapidly so that the appreciation of RMB is expected. So in order to keep the stable of the exchange rate of RMB, the government input plenty of money so as to net off the excess foreign exchange in the foreign exchange market. But in the third quarter of 2008, as the financial crisis gave a badly influence on the economy of China, the money supply increased from tighten to loose and the bank increased the volume of commercial loan for enterprise. Meanwhile the macro-economic in China has suffered a big reverse, the CPI decreased rapidly and the increase rate of CPI. And in Jan. 2009 is only one percent. The passage researched in the transmission mechanism of foreign exchange reserve and money supply and analysis the relevant of the two variances. At last using the monthly data of M0, M1, M2 and foreign exchange reserve to build up the Double-Logarithm Model so that to get a conclusion that the foreign exchange reserve brings more influence to M1 than M0 and M2.The paper consists of five parts. Part one is the introduction part. Mainly introducing the purpose and innovation of the research. And some experts home and abroad gave an overview of the problem how do the foreign exchange reserve influence the money supply. Part two introduces the current situation of foreign exchange reserve from four aspects: quantity change, source structure, asset structure, investment structure. Meanwhile, explaining the reason of why the foreign exchange reserve increased so rapidly. Part three introduces transmission mechanism of foreign exchange reserve and money supply. Part four uses the Double-Logarithm Model to get a conclusion that the foreign exchange reserve brings more influence to M1 than M0 and M2. Part five is the last part of the paper which put forward some suggestions and methods to loss the influence of foreign exchange reserve on the money supply so as to keep the independence of money supply policy. For example, using plenty of foreign exchange reserve to investing outside, using the excess foreign exchange reserve to help small enterprise investing outside so that to decrease the holding of foreign exchange reverse inside. From other points, we can also using the policies so as open market operations, controlling the investment asset flowing inside and so on to loose the influence of foreign exchange reserve to money supply, and keep the independence of money supply in China.