| In an open economy, the monetary base of one country consists of foreign exchange reserves and domestic credit. The foreign exchange reserves together with the changes have become the connection point for both domestic and foreign monetary policies. Therefore, they are an important factor to constrain the independence and effectiveness of monetary policies. China's foreign exchange reserves have witnessed rapid growth ever since China's foreign exchange system reform. At the end of December 2009, China's foreign exchange reserves reached 2.399152 trillion U.S. dollars. In this case, the influence of foreign exchange reserves on the financial and economic performance and monetary policies are needed to be considered to achieve the expected economic policy objectives.Based on related theories and previous studies, the thesis gives detailed elaboration of the impact mechanism of consistent increase of China's foreign exchange reserves on monetary policies. According to regulations, foreign exchange reserves have changed the basic money supply, weakened the autonomy of monetary policies, enhanced the endogenous money supply and reduced the money supply delay. Some monetary policy tools such as re-lending, statutory reserves and open market operations are employed to eliminate these negative impacts, but they have limited effects. Moreover, as empirical analysis shows, foreign exchange reserves have a significant positive relationship with money supply. However, when promoting economic growth, reserves also result in inflation and the appreciation of RMB. The thesis, in order to eliminate the negative influence of high foreign exchange reserves on monetary policies, holds that it should get out of the negative influence of high foreign exchange reserves by the effective management of foreign exchange reserve, reserve institutional innovation and probable choice of China's monetary policies . In this way, Chinese economy will witness steady and healthy development. |
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