An Empirical Study On The Relationship Between Foreign Exchange Reserves, Money Supply And Price Indices In China

The international balance of payments continued to appear "double surplus" andforeign exchange reserves also continued to appear the same phenomenon with therapid development of our economy. Foreign exchange reserves increase, then thesupply of foreign exchange exceeds the demand of foreign exchange in the foreignexchange market. In order to maintain the stability of exchange rate, the central bankwill buy a large number of foreign exchange, then forming the foreign exchange,the central bank will invest a lot of money base passively, then social total moneysupply increase.China started to reform the RMB exchange rate system, carried out the managedfloating exchange rate system that based on market supply and demand andreferenced to the basket of currencies in July21,2005. The central bank willimplement the sterilization measures to maintain the stability of RMB exchange rate,according to the excessive foreign exchange in foreign exchange market. But it cannot fully hedge the excess liquidity that caused by the foreign exchange through theanalysis. In the short term, the foreign exchange sterilization measures are effective,but in the long term, its effectiveness is very small, even it will cause some negativeeffect on the economy.At the same time, China’s price level had fluctuation trend after the reform andopening up. Especially in recent years, the lager prices rose, inflation pressure came.Inflation not only affects people’s daily life, but also affects the healthy and stabledevelopment of China’s economy. In the case of foreign exchange reserves continuedto rise, whether the price level, the money supply are related with foreign exchangereserves, what is the relationship between the three, and how much, have been thefocus in academic yield.Therefore, this paper will analysis the changes and the influence mechanismamong the foreign exchange reserves, the money supply and the price index since1994, which based on the international balance of payments monetary analyses theory,the monetary multiplier theory and the monetary quantity theory. Come to aconclusion that there is a single causal relationship among the foreign exchange reserves, the money supply and the price index, through constructing the model oftime series econometric with annual data from1994to2013, and using the relatedinspection techniques.Finally, this paper will propose some suggestions that are good to moderate theinfluence of foreign exchange reserve to price index. First is to adjust economicdevelopment strategy, promote the balance of international payments, by acceleratingthe transformation of the mode of economic development, actively expand domesticdemand, and change the "export oriented" trade policy and actively expand imports.The second is to expand the range of floating exchange rate through continuing tocarry out the foreign exchange settlement system according to your wishes. The thirdis to improve the weights of foreign exchange reserve currency, promote theupgrading of the industrial structure. The forth is to establish the new foreignexchange reserve management evaluation mechanism from the national strategic level,promote the adjustment of economic structure. The fifth is to promote theinternationalization of RMB, balance the external economic. The sixth is to acceleratethe development of various financial markets and commodities trading platformconstruction, promote the balanced development of economy.