The Study On Numerical Correlation Between China's Foreign Exchange Reserve And The Price Index

Since the start of the system of exchange settlement and sales in 1994, in less than two decades, the exchange reserve has rocketed from the 51.6 billion USD of closing sum of 1994 to the nearly trillion USD in 2008. Exchange reserve and its fluctuation has become the joint of our domestic financial policies and the external ones, while also a significant factor impacting the monetary policy validity of this country. In order to achieve the scheduled policy target, the monetary authority has to take the impact brought by exchange reserve on the economic and financial circulation and the acting processing of monetary policy into consideration.This article firstly combs the transmission mechanism of foreign exchange reserve to the RMB counterpart of foreign exchange reserves to the currency supply finally the price level, then has a review of fluctuation and characteristics of exchange reserve, the RMB counterpart of foreign exchange reserves since the system of exchange settlement and sales, the sum and growth rate of currency at each level and prices indices at corresponding time. After above mentioned review, it is found that there exist consistency between the foreign exchange reserve fluctuation and the currency supply and price indices. Besides this, the robust growth of exchange reserve causes the rapid surge of RMB counterpart of foreign exchange reserve directly. Through calculation and comparison, the channel of the RMB counterpart of foreign exchange reserves are found have became the main tune of currency issue instead of domestic credits in this country.According to the growth status of exchange reserve, I divide the period since the start of system of foreign exchange settlement and sales into 4 parts. These are rapid-but-unsteady-growth-stage from 1994 to 1997, the low-growth-rate-period from 1998 to the second quarter of 2001, the robust-and-steady-growth-rate period from the 3rd quarter of 2001 to 2nd quarter of 2008, and the sharp-declining-growth-rate-period from the third quarter of 2008 to the second quarter of 2009.Taking the ground of periods divided, the author makes the empirical analyses on the impact on money supply and price fluctuation brought by exchange reserve. These results indicate:in the two period of robust growth of foreign exchange reserve naming from 1994 to 1997 and 2001 to 2008, exchange rate is the reason for excess liquidity and high pricing level, while in the two periods when the exchange reserve experienced gloomy growth even at times the closing sum declined, even the central bank trough broaden the domestic credits to remedy the insufficiency of currency issue through the channel of the RMB counterpart of foreign exchange reserves, but the amount of money issue still could not keep the usual growth level and therefore the price level still fell into depression.The empirical results illustrate since the system of exchange settlements and sales enforced, the ontogenesis of money issue has been strengthened and make it much more difficult for the central bank to control the money supply. Although the central bank has made use of multiplied number of writing-off policies, the potency is not convincing enough. Eventually, exchange rate still has impact on price level and to some extent adversely affects monetary policy validity of our country.Based on the empirical analysis result the author propose some countermeasure and advise:reform the system of exchange, settlement and sales and broaden the flexibility range of exchange rate of RMB, broaden the channel of release newly added base currency and diversify central bank's write-off means and adopt comprehensive measure to accelerate the relatively suitable balance of payments and harmonize the coordination between fiscal policy and monetary policy; stimulate the domestic demand and promote the economic equilibrium.