How Trade Surplus And Reserve Accumulation Affect Monetary Policy Autonomy:an Empirical Analysis Of China

Since the1990’s, China has maintained the double surplus of the current and capital accounts, And the scale of the foreign exchange reserve is also growing fast. There are osculating relationship between the accumulation of foreign exchange reserves and the double surplus expansion, on the one hand, China has a stable political environment, a cheap but highly efficient Labor market and a prosperous market prospect. Those dominant factors of FDI inflows don’t change easily in short term. On the other hand, China’s trade surplus is an important part of the pattern of global economic imbalances. And the differences in the saving rate and the trade restructure between east Asia (including China) and the United States are the main background of global economic imbalances. Savings and trade restructuring pace is difficult to have a big change in the short term, too. Judging from these, under the condition of stable exchange rate and economic structure, China’s trade surplus will exist for a long time.Firstly, this paper focuses on the issues of how current account surplus and capital account surplus have impact on the accumulation of foreign exchange reserve. Based on data from the year of1994, we make a conclusion that there is a direct relationship between the trade surplus and foreign exchange reserve accumulation. But there is no evidence show that the relationship appears between capital account surplus and foreign exchange reserve accumulation.Monetary autonomy is one of the most fundamental issues in an open economy, in both policy and academic circles. The goal of China’s monetary policy is to maintain the stability of the currency and thereby promote economic growth. With the expansion of the economic globalization and the improvement of the openness level in china, china’s monetary policy will increasingly influenced by external, and the management of monetary policy will meet many new variables. Under the condition of closed-economy, base currency will be decided by the central bank independently. But under the open-economy, base currency will affect by the balance of payments. Endogenous enhancing makes the monetary policy independence weak. The conventional wisdom regarding the "Trilemma" in international macroeconomics dictates that countries can pursue two of three options:fixed exchange rates, domestic monetary autonomy and capital mobility.The second question, also the core part in this article is to calculate the "Trilemma" indexes as well as to empirical the relationships. To establish the "Trilemma" indexes, we find that the relationship between monetary independence and the Exchange-rate stability is positive, and the relationship between monetary independence and Financial openness is negative. We believe that the model accords with principle of "Trilemma", and for our government, to keep monetary policy independence and Exchange-rate stability is as the most important policy goals and to keep capital freely flows is as a minor goal in practice.The third question is focused on how foreign exchange reserve accumulation affect on the China’s monetary independence. Studies have found that Chinese foreign exchange reserve accumulation is as a means of self-insurance against exposure to volatile "hot money" subject to frequent, sudden stops and reversals, exposed to the hot money inflows to fight under the risk of "sudden stop". We interpret this contribution of foreign reserves as the anchoring role for retaining monetary autonomy in facing a "fear of floating." Higher levels of foreign reserves should enable a country to pursue a higher level of monetary independence with the same level of exchange-rate stability and financial openness.In this paper, we divided the main contents into four parts:the first part is to explain the issues of how trade surplus affect the reserve accumulation. Through the testing methods of Granger test, we find that the relationship between current account surplus and foreign exchange reserve accumulation is a two-way causal relationship. And there is no evidence show that between capital and financial account surplus and the foreign exchange reserve accumulation has the same causal relationship. The second part we analyzed the connotation of the monetary independence, and the way how foreign exchange reserve has effect on monetary independence. The third part is focus on a new method of measurement for all three "Trilemma" indexes-to figure out the relationship among the fixed exchange rate, monetary policy independence and capital openness. We set up monetary independent index, exchange-rate stability index and financial openness/integration index and through tools such as empirical model and diamond model, to analyze the relationship between three indexes and foreign exchange reserves. Foreign exchange reserves work as a role of self-insurance against exposure to volatile "hot money" subject to frequent, sudden stops and reversals. Foreign exchange reserves has an obvious effect to improve China’s monetary policy independence. The fourth part is the policy recommendations. This paper puts forward some Suggestions on improving the international balance of payments, capital account management and foreign exchange reserves management in order to enhance the role of foreign exchange reserves as stabilizing the economy and increasing the independence of monetary policy in our country.