The Impact Of Foreign Exchange Reserve Growth On China 's Monetary Policy

In recent years, China’s foreign exchange reserves increased rapidly. In China’s current foreign exchange system, the rapid growth of foreign exchange reserves will inevitably bring about the increase of foreign exchange reserves. The monetary policy in China has formed a serious disturbance. The purpose of this paper is to investigate the impact of foreign exchange reserve on the monetary policy in China. Based on the research to absorb the essence of the predecessors, the paper will proceed the research to this problem more deeply, and puts forward the new viewpoint and the method.In this paper, combing through the theory, we analyze the possible impact on the monetary policy of foreign exchange reserves, as well as the channel of the effect, and the distinction between "intermediate target" and "final goal" of monetary policy. At last, we make an empirical analysis on the influence. In theory, inspired by Keynes’ s "diminishing marginal propensity to consume theory" and "Engel’s law", this article proposed the private sector and commercial banks with "marginal short-term assets held tend to decline" behavior in the choice of assets conjecture, and adopts the qualitative verification data to this conjecture. Based on this assumption, this paper argues that the increase of foreign exchange reserve will cause the RMB asset size increased of commercial bank and the private sector, and this would affect the result of long and short term asset selection behavior of the private sector and commercial banks. In this way, the increase of foreign exchange reserve will have a positive impact on monetary multiplier. The long-term deposit reserve rate is relatively low and the short-term deposit reserve ratio is relatively high. The economic participates have a different allocation proportion between long-term and short-term asset. Just in this way, the money multiplier is affected. At the same time, currency leakage and excess deposit reserve ratio also have a influence on monetary multiplier. In the empirical aspect, this paper use VEC(vector error correction model) to research the influence of increasing foreign exchange reserves on money multiplier and base money. The result is consistent with the theoretical analysis, a positive impact. In addition, this paper use SVAR(structural vector auto regression) model to research the impact of foreign exchange reserves on the ultimate goal of monetary policy. The model emphasizes the importance of structural impulse response function analysis. The research shows that foreign exchange reserves have positive impact on the price index and the GDP increment. In the Granger causality test of foreign exchange reserves, incremental GDP and the price index, the variables have a mutually causal relationship, except that the GDP increment is not the Granger reason to foreign exchange reserves.A series of research results show that, the growth of foreign exchange reserves will affect monetary policy to regulate the economy, will weaken the independence of monetary policy, increase the endogeneity of money supply, and caused the confliction between exchange rate policy and monetary policy. According to the research results, this paper puts forward a series of policy recommendations to deal with related difficulties.