Empirical Studies On Effect Of Different Forms Of Foreign Exchange Reserves On Inflation

In recent years, our country economy developed rapidly, the international balance ofpayments were surplus for years, and then leading to China’s foreign exchange reserveshave been sharp increase. And in2006, China’s foreign exchange reserves exceed Japan’sbecame the world first.Until the end of2012, China’s foreign exchange reserves hadreached$3.3trillion. Plenty of foreign exchange reserves enhanced the comprehensivestrength of our country,kept the country’s economic and financial security and stability.Butour country foreign exchange reserves obviously far beyond the actual demand, the size isso big, the growth is so fast that brought a variety of negative effects to China’s economicand financial operation. Among them，inflation is most protruding.The paper adopted the method of theoretical analysis and empirical test. ContrastingJapan and South Korea,who is also has high foreign exchange reserves,the paper having acomparative study on the relationship between the different forms of foreign exchangereserves and inflation in China, Japan and South Korea. In Japan and South Korea,therehad set up the exchange stabilization fund, when their government agencies want to buyforeign currency,they were use the exchange stabilization fund. If the Japanese yen or wonin the exchange stabilization fund are not enough, the ministry of finance will issuesecurities such as special national debt. Using fiscal funds to buy foreign currency may notrelated to currency issue,and then it will not lead to inflation.while in China, the increase offoreign exchange reserves is always along with currency issue.and this may result toinflation.both the theoretical results and empirical results proved the increase of foreignexchange reserves are not related to inflation in Japan and South Korea.While in china, therelationship between the foreign exchange reserves and inflation is long-term and stable.According those results,we may know seting up the exchange stabilization fund can cut offthe relationship between the foreign exchange reserves and inflation.In China,the increase of foreign exchange reserve will directly increase the number offoreign exchange, and then increasing the base money. Under the action of moneymultiplier, the base money can increase the money supply which can increase the price level. According to the empirical results, if China’s foreign exchange reserves increases1%,in the long run,the inflation will increases0.0317%. and in the short time, there were aslohave a significant and positive influence which increase gradually.China is export-oriented. So the domestic economy relies on the overseas marketdemand. Inevitably, China’s foreign exchange reserves will go on increaseing.but avoidinginflation is significant and urgent.So first of all,our government agencies must reform theforeign exchange management system,then reforming the form of foreign exchangereserves.