The Dynamic Demand Model of China´s Foreign Exchange Reserves

This paper studies the demand for China´s foreign exchange reserves. Previous research using econometric models in this area has a common problem that demand was replaced by the actual holdings, namely, assuming foreign exchange reserves achieve equilibrium at any time. In order to avoid the problem, the current study builds a dynamic demand model of China´s foreign exchange reserves by the method of disequilibrium. Through the empirical analysis using the data from 1978 to 2007, we find that the scale of China´s foreign exchange reserves are determined by gross domestic product (GDP), the dependence on foreign trade and investment rate. GDP and the dependence on foreign trade have a positive impact on China´s foreign exchange reserves while investment rate has a negative impact. Furthermore, according to the dynamic demand model, we estimate the speed of the dynamic adjustment of China´s foreign exchange reserves.