Study Of Relationship Between The Foreign Exchange Reserves And The Effectiveness Of Monetary Policy In China

Along with the deepening of China's reform and opening up, and developing of export-oriented economy, the foreign exchange earnings increase greatly. In June 2009 the foreign exchange reserves totaled 2.131606 trillion U.S. dollars, so China had become the largest foreign exchange reserves. Therefore, the problem that money supply grows endogenously caused by rapid increase of foreign exchange reserves, is obvious in our country. The foreign exchange reserves affect our money supply and the foreign reserves offset policy of central bank also limits monetary policy transmission mechanism indirectly, so that the effectiveness of monetary policy is reduced.Firstly, this paper describes the theories about effectiveness of monetary policy, and monetary policy transmission mechanism. Secondly, this paper analyzes the relations between the effectiveness of monetary policy and foreign exchange reserves theoretically. Then the relations are analyzed empirically. Finally, the related recommendations would be put forward according to results of above analysis. This logical framework of this paper is that bringing issues firstly, theoretical analysis secondly, empirical analysis thirdly and last solving problems.The main contents of that chapters and viewpoint:Chapter 1 is the introduction section, including the meaning and purpose of this research, as well as literature reviews. Foreign study is mainly about scale of foreign exchange reserves. And the research about effectiveness of monetary policy is that the monetary policy is valid or not. Domestic researches think that foreign exchange reserves influence our monetary policy greatly in theory.Chapter 2 introduces the theories about the effectiveness of monetary policy. The traditional economic theory divides effectiveness of monetary policy into valid and invalid. Classical School, the early Keynesian school, monetarism school and ration expectation school holds the idea that the policy is invalid. The Wicksell's monetary equilibrium theory, Keynesian school, comprehensive classical school and the new economics school about system thinks that policy is valid. Monetary policy transmission channels mainly include interest rates, capital markets, credit markets, wealth transmit, exchange rates and money supply pathway conduction.Chapter 3 analyzes relations between foreign exchange reserves and the effectiveness of monetary policy. First section analyzes the reasons for the rapid growth of foreign exchange reserves, in which the increase of trade surplus and foreign direct investment are direct factors causing foreign exchange reserves to increase. Second section analyzes the impact of foreign exchange reserves on money supply. After foreign exchange reserves are absorbed, the RMB counterpart of foreign exchange reserves have to rise. In order to balance the balance sheet, the central bank has to increase money supply under effect of the monetary multiplier. Third section analyzes the practice in history and limitations of the foreign reserves offset policy Historically, in response to the passive money supply the central bank uses many measures like recycled commercial banks re-lending, the bond repurchase, the central bank issue tickets, adjusting the statutory deposit reserve ratio, and window guidance and so on. Fourth section analyses the impact of foreign exchange reserves on monetary policy transmission channels on the base of the above analysis. That channels include interest rate, the exchange rate, the capital market, credit markets pathway.Chapter 4 research the influence from foreign exchange reserves to the effectiveness of monetary policy by the method of empirical analysis. First section analyses the effect of foreign exchange reserves on money multiplier empirically. Second section analyses the effect of foreign exchange reserves on base currency. Third section analyses the effect of foreign exchange reserves on monetary policy effectiveness. The conclusion is that the foreign exchange reserves are stable factors of money multiplier and base currency in long-term and short-term.Chapter 5 is.the policy recommendations. This paper argues that the impact of foreign exchange reserves should be reduced by controlling export, reforming exchange rate system, optimizing foreign reserves offset policy and so on. This paper's thesis is strong practical for our country. The innovation of this paper is to analyze the effect of foreign exchange reserves on the relevant parameters by using the method of empirical analysis.