The Analysis On Optimal Foreign Exchange Reserve In China Based On The Agaraual Model And Co-integration

After the literature review of optimal foreign exchange reserve, the thesis introduces the general knowledge of foreign exchange reserve, generalizes the present situation of foreign exchange reserve in China. At the same time, the thesis introduces two main ways of researching the optimal foreign exchange reserve.Then, after introducing the traditional Agaraual model, the thesis expands the affecting factors according to our country's actual situation. After that, the thesis calculates the upper limit and lower limit of desired foreign exchange reserve using the fixed model, and compares with the real scale of the years between 1990 and 2006. The result shows that our country's foreign exchange reserve begins to deviate from the optimal scale sharply since the year 2002, and the situation has the trend of deterioration.After the theoretical analysis of Co-integration methodology in econometrics, the thesis builds the Co-integration model which reflects the long-run balancing equilibrium between foreign exchange reserve and several factors. Through the model, the thesis finds that export, import, M2 and fluctuation of international payment are important factors of the Foreign exchange reserve. At the meantime, the thesis calculates the optimal scale of foreign exchange reserve using the figures which disposed with the HP filter, and compares with the real scale. The result demonstrates that our country's foreign exchange reserve is excessive in many years between the year 1985 and 2006, and begins to deviate from the optimal scale sharply since the year 2002.Eventually, the thesis draws conclusion and makes some suggestions to optimize the scale of Chinese foreign exchange reserve. The conclusion shows that it's difficult to determine the consistent optimal scale of some years using the two methods. However, the result of two methods both shows that our country's foreign exchange reserve begins to deviate from the optimal scale sharply since the year 2002. Based on the conclusion, the thesis makes followed suggestions. First, China should increase import to take full advantage of plentiful foreign exchange reserve, as well as enhance external investment to remit the pressure of too much foreign exchange reserve. Secondly, China must improve the ability of international financing and develop secondary foreign reserve to reduce the holding of foreign exchange reserve. Thirdly, China should improve the management ability of foreign loans and set up sinking fund timely. At the meantime, improvement in management of reserve investment, reform of the formation mechanism of RMB exchange rate etc, will also benefit the adjustment of the scale of foreign exchange reserve. Only in these ways, China can reduce the excessive holding of foreign exchange reserve and enjoy the optimal scale of foreign exchange reserve.