The equilibrium level and dynamic adjustment study of Chinese international exchange reserves from the viewpoint of financial stability

From the viewpoint of financial stability, this paper sets up the demand model for Chinese international reserves by extending the buffer-stock model of international reserves. The empirical analysis shows that the extended buffer-stock model is applicable to Chinese international reserves. The underlying factor resulting in the growth of reserves is the export-oriented economic development pattern. More FDI and the strengthening of financial deepening will increase the demand for precautionary international reserves. Further, this paper uses the Heaviside function to partition the VECM and finds Chinese international reserves misalignment will move towards its equilibrium level asymmetrically in short term. Moreover, the change of US monetary policy and exchange rate would impact the short-term adjustment process.