The Optimal Foreign Exchange Reserves Theory And Empirical Research

In the open markets condition,as the global economic integration gets deeper day by day,allnations are faced with a greater threat because of international capital flows and economicl crisisrisk,thus a rational scale of foreign exchange reserves which can avoid of the risks generallybecome the focus of the society, especially for China whose foreign exchange reserves has aconstantly rapid growth in a long time.This paper contains a theoretical and empirical research on China’s optimal foreign exchangereserves.Theoretical analysis consists of two parts.Firstly it checks the relationships of the factorswhich affect the demand and supply of foreign exchange reserves,as well as the relationshipbetween the various factors and the macro-economy development.Then we get the supply anddemand model of foreign exchange reserves.Secondly,we reference Jeanne&Ranciere theory(2008)and based on government utility maximization,we construct a government total cost function,including output,external debt,foreign direct investment and transfer of government spending(thetransfer expenditure mainly is foreign exchange reserves)as well as a government total utilityfunction which is based on the government total cost function.We try to meet a government totalutility maximization under the conditions of the government total cost constraint,that is,achieve theoptimal level of foreign exchange reserves.Then we deduced the optimal model of foreignexchange reserves.The empirical research based on the above two models.First is the supply anddemand model of foreign exchange reserves.We use Eviews software do ADF stationaritytest,Granger causality test and Johansen cointegration test for each factor.It shows that the data isstable after lagging two issue,causal relationship exists,the residual unit root test is stable,there exista long-term stable relationship,so we get a long-term supply and demand of foreign exchangereserves model.Secondly is the empirical analysis based on the optimal model of China’s foreignexchange reserves,all the data is coming from financial account of balance of payments statement.,so we get the optimal rate of foreign exchange reserves.At last,based on the research above,thepaper puts forward some short-term and long-term policy suggestions to improve the scale ofChina’s foreign exchange reserves.