An empirical analysis of the relation of foreign exchange reserves and currency supply M2 in China

In China, with the foreign exchange reserves sustainable growth funds outstanding for foreign exchange has been the main channel for the center bank to put monetary base and one of the main reasons which causes the currency supply to increase greatly. Through the empirical analysis and test in this paper, the conclusions have been drawn empirically: the increase of foreign exchange reserves truly has impelled the supply of China currency to augment because of the mutual long-term equilibrium; in short-term, foreign exchange reserves has the impact on currency supply, but it is not distinct. There is Granger causal relationship between foreign exchange reserves and M2, which shows that currency supply boost the foreign exchange reserves in return. In order to eliminate the pressure of inflation and keep the monetary policy independent, we should speed up the development of money market, perfect the monetary policy tool, and carry on the financial innovation positively. Moreover, we should control the scale of foreign exchange reserves suitably by eliminating the system reason which causes the excessive growth of foreign exchange reserves, deepen the reform of the foreign exchange system and speed up the development of the foreign exchange market.