Empirical Analysis Of The Impact Of Foreign Exchange Reserve Growth On Monetary Supply Based On China’s Experience And Data

Since the1994reform of the RMB exchange rate regime, China’s foreignexchange reserves began to enter a new period of fast growth. Up to now, it hasexperienced two rapid growth period and two slower growth period. Since2002,China’s foreign exchange reserves has been growing up at a rate of more than30%per year; until the2008financial crisis, this speed reduced a little due to the decline ofour foreign trade. High-speed growth brought the accumulation of huge foreignexchange reserves, which continue to impact on our country’s monetary supply andenhance its endogencity thereby affecting the effectiveness of monetary policy.This paper discussed the impact of China’s foreign exchange reserves on themonetary supply from theoretical and empirical perspectives. Firstly, the authorcombed the domestic and abroad existing theories on the relationship between foreignexchange reserves and monetary supply; next, analyzed the causes of high foreignexchange reserves from the perspective of the source structure, and on this basis, wefocuses on the impact mechanism and the current situation of our foreign exchangereserves on monetary supply; then we use the cointegration theory, error correctionmodel (ECM) and other modern econometric methods to do our empirical analysiswith China’s data since2002; empirical results showed that our country’s foreignexchange reserves changes do have an impact on the monetary supply fluctuations,and foreign exchange reserves had a long-run equilibrium relationship with differentlevels of monetary supply. Given the extraordinary growth of China ’s foreignexchange reserves in recent years, we need address this issue from the optimization ofthe management system of foreign exchange reserves and reducing the impact offoreign exchange reserves on monetary supply.