Theoretical and Empirical Research on Dynamic Optimization Model of Structural Adjustment of International Reserves

Abstract

Considering the unreasonable currency structure of Chinese foreign reserve, this paper analyzed the optional asset sorts according to currency structure of trade and investment, as well as current status of global international reserves. The author took the hypothesis of interest rate parity to figure the dynamic return of different assets and its expected depreciation, and constructed a quadratic programming constrained model to analyze quantitatively how to adjust foreign reserve structure dynamically. Empirical results show that China needs not only to decrease dollar reserve to increase the reserve of Euro, Yen and Pound, but also to switch part of foreign reserve into gold reserve.