The Optimal Currency Composition of China´s Foreign Exchange Reserve

In this paper, we study how to select the reserve currencies and how to obtain the optimal portfolio for foreign exchange reserve. We set the return of foreign exchange reserve as the main studying target. According to Dooley model, we choose USD, yen, euro and pound as our country´s reserve currencies and set external debt and import trade flow as constraints, under the fixed exchange rate regime and the floating exchange rate regime, respectively calculate an optimal composition of reserve currencies. Our result shows that both yen assets and euro assets need to be increased in china´s foreign exchange reserve. Moreover, the holding of dollar assets needs to be decreased.