If the central bank increases its gold foreign exchange reserves, the money supply will increase. The increase of gold foreign exchange reserves by the central bank is one of the channels for the central bank to issue money.
What is the relationship between China's foreign exchange reserves and domestic currency circulation (or circulation)?
Foreign exchange reserve, also known as foreign exchange reserve, refers to the foreign exchange part of the international reserve assets held by a government, that is, the creditor's rights held by a government in foreign currency are assets held by a monetary authority of a country and can be converted into foreign currency at any time.
The Influence of Central Bank's Foreign Exchange Market Operation on Money Supply
The base currency refers to the sum of the cash in circulation plus the deposit reserve of commercial banks. The balance sheet of the central bank shows the total monetary liabilities. According to the double-entry bookkeeping principle, the balance sheet of the central bank corresponds to the following: base currency = cash in circulation+legal deposit reserve of commercial banks+excess deposit reserve = central bank's external net assets+government creditor's rights assets+creditor's rights to commercial banks+other financial assets. When the central bank buys its own currency in the foreign exchange market, it reduces the cash in circulation, which is an important part of the base currency.
Why do you say that the increase in foreign exchange reserves should correspondingly expand the money supply?
As a universal equivalent, money is also a commodity. In order to obtain foreign exchange reserves, it is necessary to buy foreign currency (foreign goods) with domestic currency (domestic products). In order to obtain more foreign currency, it is necessary to issue more domestic currency (similar to producing more domestic goods). In this way, the increase of foreign exchange reserves will correspondingly expand the money supply. If there are too many foreign exchange reserves, it will increase the pressure of inflation and increase the difficulty of monetary policy. In addition, holding too much foreign exchange reserves may also suffer losses due to the depreciation of foreign exchange rates. Therefore, foreign exchange reserves should be maintained at a moderate level.