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Transmission effects of foreign exchange reserves on price level: Evidence from China

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  • Chen, Langnan
  • Huang, Shoufeng

Abstract

We investigate the transmission effects of foreign exchange reserves on price level in China by utilizing a nonparametric model. First of all, we employ VAR co-integration analysis to obtain the number of lagged periods in every stage. And then we estimate the elasticity of foreign exchange reserves to money supply and the elasticity of money supply to consumer price index respectively with nonparametric estimations. Finally we use the results from nonparametric estimations to calculate the cross elasticity of foreign exchange reserves to consumer price index. We find that an increase in foreign exchange reserves will lead to an increase in money supply, which in turn will result in an increase in price level.

Suggested Citation

  • Chen, Langnan & Huang, Shoufeng, 2012. "Transmission effects of foreign exchange reserves on price level: Evidence from China," Economics Letters, Elsevier, vol. 117(3), pages 870-873.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:870-873
    DOI: 10.1016/j.econlet.2012.06.037
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    1. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330, National Bureau of Economic Research, Inc.
    2. Mohsin S. Khan, 1979. "Inflation and International Reserves: A Time-Series Analysis (Inflation et réserves internationales: analyse de séries chronologiques) (Inflación y reservas internacionales: Un análisis de series ," IMF Staff Papers, Palgrave Macmillan, vol. 26(4), pages 699-724, December.
    3. Sideris, Dimitrios A., 2008. "Foreign exchange intervention and equilibrium real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 344-357, October.
    4. Taylor, Dean, 1982. "Official Intervention in the Foreign Exchange Market, or, Bet against the Central Bank," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 356-368, April.
    5. H. Robert Heller, 1976. "International Reserves and World-Wide Inflation (Réserves internationales et inflation mondiale) (Reservas internacionales e inflación mundial)," IMF Staff Papers, Palgrave Macmillan, vol. 23(1), pages 61-87, March.
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    Cited by:

    1. Su, Chi-Wei & Wang, Dan & Mirza, Nawazish & Zhong, Yifan & Umar, Muhammad, 2023. "The impact of consumer confidence on oil prices," Energy Economics, Elsevier, vol. 124(C).

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    More about this item

    Keywords

    Foreign exchange reserves; Price level; Nonparametric approach;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • F3 - International Economics - - International Finance

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