Foreign Exchange Reserves, Rapid Growth Of Research On The Effectiveness Of Monetary Policy In China

With the sustainable surplus in the balance of payments and continuous promotion of foreign exchange system reform, Chinese foreign exchange reverse grew rapidly in the 1990s. By the end of 1996, it exceeded 100 billion dollars and the number was 194.6 billion at the end of 2008. From 2000 to 2008, foreign exchange reverse achieved more than decuple increase amplitude. The great amount of foreign exchange reserve definitely has positive influence on Chinese economy; however, the negative effects were appearing afterwards. There's a large amount of basic money outflow because of that the central bank need to offset the increased foreign exchange cover. The great increase of money supply has also increased the market liquidity which would result in a raise of price, and followed the pressure of inflation. The rapid growth of foreign exchange reserve affected the independence and effectiveness of Chinese monetary policy.The thesis first analyze the impact of the growth of foreign exchange reserve on the changes of money supply in theory, and then use empirical analysis method to analyze the correlations between foreign exchange reserve and CPI, as well as the influence that foreign exchange reserve has on economic growth. Both theoretical and empirical analyses have proved that foreign exchange reserve has a great impact on Chinese monetary policy. It did promote the economic growth but also lead to the increase of price and liquidity which would cause inflation in some extent. Based on the research, the thesis has also proposed some effective measures to improve the effectiveness of Chinese monetary policy.