Research On The Impact Of The Increasing Foreign Exchange Reserve On The Monetary In China

In recent years, China’s foreign exchange reserves continue to rise. The foreign exchange reserves reached＄1,066,344,000,000in2006, for the first time surpassed Japan, so it was the world’first, nowadays it is still huge. On one hand, the huge foreign exchange reserves protect the ability of China’s external payments, on the other hand, the negative impact of the domestic economy which caused by the huge foreign exchange reserves become more prominent. The huge foreign exchange reserves will weak the effect of monetary policy, what’s to worse; it will affect sustainable development of China’s economic. Therefore, to study the relationship between the foreign exchange reserves and the monetary policy implications in this background, not only has a high theoretical significance, but also has a strong practical significance.This paper is divided into five parts. The first chapter is introduction, mainly talks about this paper’s background, the review of the related literatures, the innovation and shortage of the paper. The second chapter describes the development and the current situation of China’s foreign exchange reserves, and mainly analysis the reason for the development, at last, talks about the problem with the money policy which caused by the foreign exchange reserves. The third chapter is the theoretical analysis, according to it, the consistent increase of foreign exchanges restricted the monetary policy tools, enhanced the independence of the monetary policy intermediate, and limited the monetary policy objectives. So, the huge foreign exchange reserves weaken the effect of monetary policy. The fourth chapter is the empirical analysis, according to empirical analysis, the foreign exchanges made a significant impulse to the money supply, for one hand, foreign exchanges promoted the growth of the GDP, for the other hand, it brought inflation significantly. The fifth chapter is the policy suggestion, this paper made some suggestions, for example, managing foreign exchange reserves effectively, reforming of the exchange rate mechanism deeply, and improving the monetary policy further, in order to reduce the speed of the foreign exchange reserve’s growth, and to enhance the effect of monetary policy, what’s more, to promote the development of our country’s economic.