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

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.