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The Estimation of China Moderate Foreign Exchang Reserve

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Tutor: XiaZuoFan
School: Southwestern University of Finance and Economics
Course: Statistics
Keywords: appropriate foreign exchange reserve,state-space model,kalman filter,Gibbs sampl
CLC: F832.6
Type: Master's thesis
Year:  2013
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According to the latest official data published by the State Administration of Foreign Exchange and the Central Bank, up to the end of september2012, China¡¯s foreign exchange reserves has reached$3,285,095,000,000.Compared with$73.597billion in1995, it nearly increased44times.Although, the domestic institutions could hold foreign exchange according to their need from August13,2007,but under the expectation of RMB appreciation, individuals and institutions unintentionally hold foreign exchange reserves. The scale of China¡¯s foreign exchange reserves stil growth strongly. After2010, Affected by the European debt crisis and the the financial crisis in2008,the global economic slows down and the external trade environment get deterioration,which severely affects our foreign trade and foreign exports.Under the combined harmful effects of various factors, our foreign exchange reserves, compared to February2012, reduce$24.562billion in September2012. Faced with this situation, a detailed analysis of our foreign exchange reserves is necessary.In recent years, due to the continued appreciation of the RMB, our foreign exchange reserves which hold large amounts of U.S. Treasury bonds appear huge losses. This increase the pressure of the foreign exchange reserves management. In the other hand, the People¡¯s Bank of China must put in huge RMB for the massive growth of China¡¯s foreign exchange reserves, which greatly weakened the effect of monetary policy in China. The excessive foreign exchange reserves which faced with high opportunity costs damage China¡¯s economic growth potential and bring inflationary pressures. All of these indicate that it is inmprotant to keep the modest scale of the foreign exchange reserves. In a word, it is necessary to maintain the appropriate foreign exchange reserves which based on China¡¯s current economic development.In this paper, first, we discuss the definition of moderate foreign exchange reserves and find that it is complex and difficult to obtain a appropriate definition. Until now, we still cann¡¯t get a universally applicable and standard moderate foreign exchange reserves formula. Secondly, the domestic and foreign scholars have adopted different methods to determine the moderate foreign exchange reserves. They get the appropriate exchange reserves start from the ratio analysis and cost-return model, to the subsequent regression analysis, inventory control models, and cointegration theory, end with econometrics panel theory and dynamic optimization model. The progress of method mianly due to consider more influential facetors in the model and cause by solving the reality problem. Combine with the advance of model and method, this paper consider of using the dynamic time-varying model to analysis our proper foreign exchange reserves. This model must be more scientific and more effective.Because of the state-space model is excellent tool to dela with dynamic economic system wich include undirectly observed variables, and the moderate foreign exchange reserves have the nuture of unobservable and Time-varying, this article adpot the state space model to estimate the proper foreign exchange reserves. The dynamic and the function of process the unobserved variables will help us to get the more accurate level of appropriate foreign exchange reserves in China. The classic methods which deal with the state-space model is the maximum likelihood estimation and Kalman filtering. With the development of computer technology, bayesian methods are used to estimate this model. Compare to the classic method, the bayesian estimation method using a large amount of information, which will be more accurate. Therefore, we apply the state space model to analysis the proper foreign exchange reserves and use the kalman filter-and Gibbs sampling to estimate the state-space model. In the end, we integrated the advantages and disadvantage of these two methods to analysis the moderate foreign exchange reserves in detail.After determining the method and the model, in the paper, we first explore the changes of foreign exchange reserves since the found of New China in order to understanding the practical reasons in the history of the foreign exchange reserves¡¯ changes. The two reasons of this change are institutional change and the economic situation at home and abroad. These two reasons have brought great energy to the foreign exchange reserves. Datas show that growing trend attributed to long time double surplus of current accout and capital and financial account. In addition reform bonus also contributes to this strongly growing trend.In the rest of this paper, we facus on specific research of the state-space model, as well as the two approaches to estimate state-space model. On the assumption of the Gaussian linear, kalman filter¡¯five recursive formula derivation processes is gradually draw. Based on these five recursive formula, we estimate the moderate foreign exchange reserves through the model. After respectively introduced the bayesian estimation and the Gibbs sampling, we detailed describe the entire bayesian Gibbs sampling method on the step of obtain the unknown parameter variables. In the bayesian gibbs sampling method, we get the stochastic simulation samples by the conditional density function, then using the samples to obtain the sample mean as the estimate of the parameters.In the specific empirical study, first, we establish the state-space equations and apply the kalman filter recursive formula to estimate the unknow variables. Then, we put the data to the model. It is concluding that proper foreign exchange reserves gradually increasing with the expansion of our foreign exchange reserves. At the same time, the gap between our foreign exchange reserves and the appropriate foreign exchange reserves is also growing.In the end, we put forward the following policy recommendations.1. Establishing a monitoring system to estimated the moderate foreign exchange reserves timely.2. Scientific management the excess foreign exchange reserves through the tational planning.3. Introduction of management talents and improve the level of the foreign exchange reserves management.4. Improve the linked rate system.
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