Research On The Impact Of Foreign Exchange Reserves On The Monetary Policy In China

As the key factor, foreign exchange reserves both reflect and restrict the independenceand effectiveness of this country’s monetary policy. China’s foreign exchange reserveswhich had a rapid growth in recent years have caused great influence on our country’smonetary policy operation and the overall economy.On the basis of relevant theories and research results at home and abroad, this articlereviews the development course of China’s foreign exchange reserves, analyzes the deepreasons of high foreign exchange reserves in our country, and then discuss its impact onmonetary policy in both theoretical and empirical methods.In the part of theoretical analysis, this paper firstly explains the theoretical mechanismof the foreign exchange reserves’ impact on each step of monetary policy; secondly, basedon the practical operation in China, it gives a detailed description of the dilemma liesbetween the growing foreign exchange reserves and our country’s monetary policy. Then itbrings to the conclusion of this part: foreign exchange reserve growth has changed thelaunch of the monetary base in our country; has enhanced the endogenous money supply,and shortened the time delay; has restricted the operating of policy tools; and finallydeviated from the final goal of monetary policy.Meanwhile, the empirical analysis of this paper is based on the VAR model, impulseresponse function and Granger causality test. The empirical conclusion is that changes inforeign exchange reserves have a significant positive impact on the money supply, whileeffect on economic growth, price level and exchange rate indirectly and limitedly.To alleviate the negative influence of foreign exchange reserves, this paper suggestsshould deepen the reform of the foreign exchange management system, perfect themonetary policy regulation system, and ultimately to promote the upgrading of industrialstructure in our country, change the mode of economic growing in China. Therefore, thedevelopment of our country’s economy could be sustained and healthy.