The Empirical Research On The Impact Of Chinese Foreign Exchange Reserve On Inflation In China

Since2003, agricultural product price, food prices and cost of raw materials have had a rise trend. Inflation has become one of the focus problems of domestic residents concerned about. Our government has introduced a number of corresponding macroeconomic policies, but the trend of inflation is still not in good control. At the same time, the Chinese foreign exchange reserve scale sustained growing ranks first in the world, which plays a good role to our country economy as well as has the adverse impact. This article will explore the high foreign exchange reserve whether to generate a certain amount of pressure on inflation and not conducive to the development of Chinese economy as a whole.The paper theoretically analyzes the impact on inflation of foreign exchange reserve, that foreign exchange reserve’s increase will lead to injection of basic money, increasing the money supply, and eventually generate the pressure of inflation. In terms of empirical observation.this paper uses co-integration test causality test, impulse response and variance decomposition to study the relationship between foreign exchange reserve and inflation, and then the results show that:there are pair wise co-integration relationship among foreign exchange reserve, the money supply and inflation; Foreign exchange reserve is the one-way Granger cause of money supply and inflation; One unit change of foreign exchange reserve and money supply can make a positive response to inflation, and foreign exchange reserve has certain contribution to inflation changes. Therefore, this paper argues that the high foreign exchange reserve can make the result of excess liquidity in our country. And due to the money supply exceeding the need of the real economy, the pressure on inflation is bigger. Finally the paper puts forward some suggestions, hoping to improve the current situation of Chinese foreign exchange reserve and inflation.