Abstract: Based on the Lucas aggregate supply model，this paper deduces the equation between the growth rate of for eign exchange reserves and the inflation rate，and takes a further study on the non-linear nexus between inflation and foreign exchange reserves in China． The findings show that the growth of foreign exchange reserves in China has a signif icant effect on inflation when the economy is in a boom period，and the level of inflation is largely determined by the changes in foreign exchange reserves． When the economy is in a period of austerity，the growth in foreign exchange re serves will not have a significant impact on the level of inflation． In addition，this paper also finds inflation and the growth of foreign exchange reserve also exist significant inflation threshold effect; the impact which comes from the growth of the performance of the foreign exchange reserve growth on inflation would be decreased with the level of infla tion declining． Therefore，we should review the structural behavior of the central bank reserve rationally，it is only a periodical behavior to balance the central bank's capital at this stage and it will not have a significant deflation effect on the current level of inflation．

Key words: Foreign Exchange Reserve; Deflation; Inflation; Central Bank