Research On The Change Relation Between Foreign Exchange Reserve And General Price Level

In open economies, imported inflation often happens, and finally affects domestic price through demand spillover system, price system and liquidity system. Liquidity system includes trade-type and capital-type, and is reflected in changes of current account, capital and finance account. Imported inflation under liquidity system means that trade and capital activities increase foreign exchange reserves, increase money supply, and result in inflation finally. The article tries to study the relations between foreign exchange reserves and domestic price based on liquidity system.The excessively accumulated foreign exchange reserve has raised widely attention, and a lot of research has focused on the relationship between foreign exchange reserves and price. The article comprehensively discusses the relation between foreign exchange reserves and price form the point view of general mass and sources of foreign exchange reserves. Firstly, the general mass of foreign exchange reserve boosts money supply, and increases the general price level. The positive analysis reflects that foreign exchange reserves have effects on money supply, and money supply has effects on general price level, too. Besides, foreign exchange reserves have direct effects on general price level, but the effect is weak. Secondly, there are three sources of foreign exchange reserve:trade surplus, FDI and hot money, and the three parts have an effect on price in their own circulation domain. The positive analysis reflects that trade surplus has little effect on general price level, but capital and finance account has a great effect on general price. In the trend of decreasing trade, the sources of foreign exchange reserve will changes in structure. The drives of foreign exchange reserve will rely more on capital and finance account, that is to say, the effect of foreign exchange reserve on price level will be more obvious.