The Shock Effect Of Foreign Exchange Purchase On Inflation And Asset Prices

This paper has in-depth analyzed the shock effect of foreign exchange purchase oninflation and asset prices from the view of foreign exchange purchase�'monetarybase�'money supply�'rising of prices and asset prices. In the empirical analysis,first is to estimate the reaction function of the central bank in order to test the effectof sterilized intervention of central bank by regression analysis, and then establishconsumer goods-real estate two sectors dynamic model, through some meteringmeans such as the VAR model, pulse response function, variance decomposition andso on. Finally, we combine the empirical results of the two parts to obtain thefollowing conclusions: China’s new foreign exchange purchase which is not sterilized(over60%) becomes the new monetary base. The increase of the money supplycaused by the new monetary base and the multiplier effect causes a rise in inflationand asset prices (house prices, stock prices), and the impact of money supply oninflation and asset prices exceeds the actual output. Compared with previous studiesoften using Granger causality test, this paper reveals the economic logic more deeply,and the theoretical foundation of empirical analysis is more solid. In addition, theimpact of foreign exchange on asset prices is also incorporated within the frameworkof the study, so the results of the analysis are more comprehensive. Finally, accordingto the analysis of the empirical results, this paper puts forward some policyrecommendations to ease the foreign exchange excessive growth. These policyrecommendations include construction of a new foreign exchange reservesmanagement system, implementation of “foreign exchange held by the people” policy,adjustment of macroeconomic policies and strategies which cause the balance ofpayments chronic surplus, improvement of the RMB exchange rate formationmechanism, acceleration of the marketization of RMB exchange rate and so on.