China's Foreign Exchange Reserves Cointegration Analysis

Foreign exchange reserve is a comprehensive variable. The scale of foreign exchange reserve is very important to a country's economy. It often keeps close relationship with the balance of payments, exchange rate regimes, international trade, international status and economic power of a country. So it's of great practical significance for us to foreign exchange reserves.In face of China's huge foreign exchange reserves, this paper establishes a foreign exchange reserve growth model in base of traditional theories. The paper analyzes the relationship between foreign exchange reserves and exports and imports, GDP, the money supply, and the exchange rate. In the process of the selection of subjects, I read of many relevant documents, such as articles on the academic perspective, and finally I got a thorough grasp of research methods and made the following breakthroughs.1. Introducing dynamic analysis methods into the management of foreign exchange reserves. Foreign exchange reserves research were originally confined to isolated, static analysis. While this paper notes that government departments should establish a dynamic management approach to make the size of foreign exchange reserves fit a country's macroeconomic development needs.2. Introducing the co-integration analysis into the management of foreign exchange reserves. The co-integration analysis overcomes the traditional econometric problem when the variables become non-smooth. Most of the variables usually did not fit for stable-financial-time-series, such as foreign exchange reserves. And the co-integration analysis is just a tool to overcome the shortcoming. Through using the modern quantitative analysis tools- "co-integration analysis" , this paper establishes short-term and long-term foreign exchange reserves balance models.3. On basis of macro- analysis, the paper fully inspects various factors, including the balance of payments, exports and imports, interest rates, inflation, money supply, economic growth ,foreign debt, capital flows and exchange rates. The paper also makes a reasonable definition of the scale of China's foreign exchange reserves since 1994.4. The most breakthroughs of this paper not only lies in the use of new ideas, new perspectives to analyze the factors affecting foreign exchange reserves, but also lies in using new econometrics, and economics research methods and modem technology to study foreign exchange reserves. Finally I make a quantitative description of the relationship between foreign exchange reserves and its affecting factors.