On The Appropriate Scale Of China's Foreign Exchange Reserves

How to measure the reasonable size of China's foreign exchange reserve is an important problem that has been interested in international financial acdemic for decades. Based on an review of the existed studies on this topic, this dissertation firstly analyzes the main factors that may influence China's foreign exchange reserve, and then discusses the advantages and disadvantages for possessing a extremely large amount of foreign exchange reserve. Secondly, we construct various time series models to forecast the trend of China's foreign exchange reserve, and the empirical results of all of the three models indicate that China's foreign exchange reserve will persist in increasing in 2010. Thirdly, using the cointegration regression method, we apply a partial adjustment model to estimate an equilibrium amount of China's foreign exchange reserve. Finally, based on the estimated equilibrium, we construct a reasonable interval for the amount of China's foreign exchange reserve, and when we compare the actual amount to the estimated interval, we find that China'a foreign exchange reserve in 2009 is excess, moreover, the excess amount of foreign exchange reserve will be further magnified in 2010 due to the forecasting analysis. Besides, we propose several advices to improve the management of China's foreign exchange reserve according to our quantitative analysis.