Empricial Analysis Of Impact Of Foreign Exchange Reserves On Liquidity

Nowadays,in the condition of close links among global economy and financial,foreign exchange reserves have a growing impact on the economy of a country which seems to be more and more important.China is a developing country,with a high degree of dependence on foreign trade,so foreign exchange reserves issue has been subject to widespread concern,especially after the 1994 reform of exchange rate institution.As China's rapid economic growth,our foreign exchange reserves have increased by nearly 30 times from 1994 to 2007,and China become the world's NO.1 big country with foreign exchange reserves.The increasing of foreign exchange reserves play an important role in adjusting the balance of payments,exchanging rate stability and strengthening the confidence of the global currency.However,excessive foreign exchange reserves also brought a series of problems and negative impacts on China's macroeconomic operation,one of this is excess liquidity.It has become a hot research on the relationship between foreign exchange reserves and liquidity in the financial theatrical field. Domestic and foreign scholars hava adopted various mathods and targets to analyse and concluded that the growth of China's foreign exchange reserves have a great impact on China's money supply mechanisms.Furthmore,the increase of foreign exchange reserves is the main reason or the direct one to cause excess liquidity in China.This article is on the basis of literature and related theories' support,select several indicators to measure the state of liquidity of different levels:the deposit-to-loan variance in banking system,the broad money supply M2,Waihuizhankuan/base money (reflecting the central bank pressure on the issuing of base money).With indicators of foreign exchange reserves,select the quarterly datas of 1995-2007 of these targets to analyse.In the core of the article, firstly, through the econometric measurement softwear,I judge that each of these time sequence variables has a stable growing trend and there is also a strong same trend of development among these variables.Then I analyse these four variables in the next article,according to the results of the model to determine whether the increase of foreign exchange reserves will have impact on the deposit-to-loan variance,M2,and Waihuizhankuan/base money.Thirdly,by adding new information impact(Innovation) to analyse the impact degree of their own and other variables.Forthly,I make a judgement of whether existing a causal relationship between foreign exchange reserves and other three indicators through Granger methord,finally draw a conclusion of the main part.In the end,I briefly dicuss the currency offset measures and it's effect which to ease the excessive liquidity hold by the central bank.Last year,China has set up an investment company to widen the investment channels for foreign exchange reserves.From this point of view,we try to find a better way of foreign exchange reserves management.The main conclusion of this article:the changes of foreign exchange reserves will induce the changes of M2,loan -to-deposit variance and the pressure of base money issue.Concrete manifestation: the increase of foreign exchange reserves, especially the increase of its growth rate can directly cause the increase in M2 and Waihuizhankuan/base money,when it comes to loan-to-deposit variance,the impact is indirectly reflected through the money supply M2.In short,the increase in foreign exchange reserves will cause the central bank system,the banking system and the entire financial system due to excess liquidity.