An Empirical Analysis about Optimal Scale of China’s Foreign Exchange Reserves

Abstract

Foreign exchange reserves are of vital importance of in the area of international finance research. It is related to a country’s ability to stabilize the currency exchange rate and balance of payments adjustment. Foreign exchange reserves are an important indicator to examine a country’s foreign economic relations. Exploring the optimal scale of China’s foreign exchange reserves is an important topic of academic research. This thesis firstly explores the optimal scale of China’s foreign exchange reserves by using the improved Agarwal model. The result shows that the China’s foreign exchange reserves are in the optimal interval in 2016. After that, the writer employs some tests to determine some variables that may have effects on the foreign exchange reserves. The test results show that the export, import, GDP, and the foreign direct investment (FDI) have co-integration with the foreign exchange reserves. And therefore these factors have the long term effects on the level of foreign exchange reserves.