Study On The Effect Of The Foreign Exchange Sterilization Policy And The Endogenous Of Money Supply

Since2001, China joined into the World Trade Organization, the surplus ofcurrent account was increased significantly. It has been the main source of paymentssurplus of international balance. Growing foreign exchange is increasing. Because ofForeign exchange reserves, our central bank was provided base currency, resulting inthe inflation pressure of China’s real economy. It also caused great pressure tomaintain the stability of the currency. In the macro background of economic situation,in recent years the independence and effectiveness of monetary policy in China underthe double pressure of capital inflows and foreign exchange reserves growthchallenge.In order to mitigate the inflation of the national economy, the Central Bank of thepeople’s Bank of China has taken various measures to foreign exchange sterilization,to eliminate the impact of foreign exchange reserves increase was caused the supplyof base money, so as to realize the goal of monetary policy of the central bank.Through empirical research, proving that the supply in China by Granger causalitytest shows that the endogenous of money supply, sterilization provides a theoryfoundation of endogenous money supply as the monetary base in China due to foreignexchange arising, which is conducive to the further through the establishment of themodified BGT model to study the inspection of foreign exchange sterilization policyeffect. Considering that in2002June, the central bank was issuing central bank bills,so this paper uses monthly data from2002June to2012October, in order to establishthe VAR model, and then through the unit root, association data integration andcausality test, impulse response graphs to examine the impact of China’s the growthforeign exchange reserves and the foreign exchange sterilization on price and output,.The conclusion like these: the increase in China’s foreign exchange reserves haveposed a greater pressure on prices, foreign exchange sterilization policy adopted bycentral bank is effective to stabilize the price, in the meanwhile, and there is no impacton the social output.