The Impact Analysis Of Foreign Exchange Reserve On China's Monetary Policy

Since reform and opening to the outside world, China has gradually realized the changes that from a planned economy to a market economy, with domestic and international investment and trade conditions gradually improved, the international balance of payments has surplus year after year, because we have been implementing more stringent foreign exchange management policies, leading to foreign exchange reserves continue to rise, especially since the reform in 1994, foreign exchange reserves has an average annual growth rate of 35%, and as of June 2011, China's foreign exchange reserves has reached 3.1974 trillion U.S. dollars, ranking first in the world.In an open economy, foreign exchange reserves is the bridge which connects the domestic monetary policy with the foreign monetary policy, plays an important role in the link. Meanwhile, the foreign exchange reserves continued to grow and bring a lot of funds outstanding for foreign exchange, which as the part of monetary system will have a broad and profound impact on the monetary policy.In this paper, we will conduct the systematic analysis about the impact of the forergn exchange reserve on China's monetary policy,and the paper will be divided into five chapters. The first chapter describes the background of writing paper, literaturereviews, research methods, and innovation and inadequate.The second chapter introduces the current situation of foreign exchange reserves, sources and reasons for continued growth, then introduces the central bank's monetary policy practice in the context of foreign exchange reserves continued to grow. The third chapter will discuss the theoretical relationship between foreign exchange reserves and monetary policy. The continued growth of foreign exchange has brought to the great impact of monetary policy,such as weakened the central bank's independence and autonomy to control monetary policy, changed money's lag in supply and structure, which had brought three difficult predicament to the central bank's monetary policy. And in the fourth chapter,we use cointegration and vector auto-regression model to analyze the impact of the foreign exchange reserve on money supply and the money lag in supply from an empirical point of view.The results show that the foreigen exchange reserves has a significant positive relationship with the Ml,and the money lag in supply is reduced with the growth of the foreign exchange reserves.At last,in the fifth chapter, for the impact of foreign exchange reserves on monetary policy,I put forward some suggestion for the improvement of monetary policy. On the specific measures of adjustment,wo should eliminate the impact through the ongoing reform of foreign exchange management system, monetary and financial system and structure of economic development,only in this way wo can maintain the healthy development of China's economy.