The Demand for International Reserves in China: An ECM Model with Domestic Monetary Disequilibrium.

This paper employs a version of the error correction model to investigate the demand for international reserves in a typical planned economy, China. Disturbances from the domestic markets are considered by incorporating the monetary disequilibrium into the model. Our main conclusions are that: (1) reserve holdings in China have maintained a long-run relationship and a stable dynamic relationship with several determinants since the 1950s, confirming China's prudential foreign reserve policy; and (2) monetary disequilibrium has significant short-run effects on reserve holdings, reflecting the authorities' 'general balancing' policy in their annual planning. [ABSTRACT FROM AUTHOR]