The Empirical Analysis Of The Index Of The Funds Outstanding For Foreign Exchange And Money Supply

Recently, the foreign exchange reserve of China is increasing continuously. At theend of2013, the amount has reached3,821billion dollar and China is the top in the world.Because of the seriously increase of trade and capitals abroad, the investment from abroad isalso increasing rapidly, which has led to the great growth of the foreign exchange reserve.At the same time, the amount of purchase of foreign exchanges is growing rapidly andthis growth leads to the multiple increase of money supply. Thus, the problem of liquidityexcess of Chinese economy exists and the money policy of the central bank isinfluenced. What’s more, this process is continuously circulating.The surplus of balance of payments of China is influenced by many factors and itwill last for a long time though it has been narrowed down recently. However, thecentral bank may continuously confront with the problem of liquidity excess. Boththeoretical and empirical analyses have proved that foreign exchange reserves and thepurchase of foreign exchanges really have a great and stable impact on Chinesemonetary policy. Although the increasing of foreign exchange reserves will promotethe economy, it will also enlarge the inflation.Therefore, in order to make sure the money policy has been effectively carried out,reducing the amount of purchase of foreign exchanges is necessary. In this case, thispaper analyses the influence of purchase of foreign exchanges does to the money policyfirstly, and then calculates the coefficient of influence. Besides, the central bankshould carry out some policies to reduce the negative effects, such as improve themanagement system of foreign exchange reserves and money policy. Finally, theinfluence of the purchase of foreign exchanges to the money policy can be narroweddown.