Foreign Exchange Reserves Demand Model Based on Chinese Government Utility Maximization and Analysis of Chinese Foreign Exchange Reserves

Abstract

At the end of 2010 China’s foreign exchange reserve reached $2847.34 billion, the author designs the maximum government utility function when consider the China government buys a part foreign exchange if company earns, it means that the China government will increase Ren-Min-Bi Yuan. And it will cause inflation. The inflation will cause disutility to government. Finally it gets the optimal fuction. VAR Regress finds the fitted value and actual value of foreign exchange reserves is nearly equal within 99.8%. The thesis gets the long term equilibrium relation of the nature logarithm of variables by VEC model, which are foreign exchange reserves, standard error of export, marginal propensity to import, the opportunity cost for foreign exchange reserves, marginal output to export. Using the sample datas in China 1980-2006 and VEC, we can find that (1) the government-holding foreign exchange reserves has positive correlation with the export standard error, (2) the government-holding foreign exchange reserves has positive correlation with the marginal propensity to import. The data and regression method are all different, but all have the positive correlation between the foreign exchange reserves and export standard error.