The Research Of Impact Of RMB Exchange Rate Changes On China Trade Price And Inflation

In the1980s, the U.S. dollar continued to depreciate, but the U.S. current account deficit sustained, which left people a lot of questions:Is Marshall-Lerner condition does not hold in the USA or there are some other reasons which led to this phenomenon? In1987Dornbusch firstly proposed the problem of exchange rate pass-through, which broke the assumption of full exchange rate pass-through made by the classical theory. Since then the exchange rate pass-through problem has gradually became a hot issue.Since joining the WTO, China’s economy sustained a stable growth, trade surplus continued to expand, RMB appreciation trend kept growing. International hot money entered to the Chinese market for arbitrage, which led to China face "double surplus" of current and capital account. In order to maintain a stable exchange rate and a continues grow of export, the central bank had to issue a large number of local currencies, funds outstanding for foreign exchange kept growing, resulting in high domestic inflation. Facing the situation of internal and external imbalances in China’s economy, people wonders, through the appreciation of the RMB, whether we could adjust the China’s trade imbalances, meet appreciation expectations of arbitrage capital and lower domestic inflation? The Key to this problem depends on the RMB exchange rate pass-through elasticity. Therefore, this paper from the perspective of exchange rate pass analyzes the impact of RMB exchange rate changes on China’s import and export prices, the trade balance and inflation.After pectination and study of domestic and foreign literature on exchange rate pass-through, this paper makes a theoretical and empirical analysis on China’s exchange rate pass-through elasticity of export price, exchange rate pass-through elasticity of import price, exchange rate elasticity of trade balance and exchange rate pass-through elasticity of domestic inflation respectively, so it helps to do a comprehensive, systematic and in-depth research on the economic impact of the RMB exchange rate changes on China’s trade price and inflation. Firstly, this paper makes a research of China’s exchange rate pass-through elasticity of import and export price of overall, HS classification and the major categories, the exchange rate pass-through elasticity of import and export price with the main trade partners, and the symmetry of exchange rate pass-through elasticity of import and export price. The results show that exchange rate pass-through elasticity of export and import price is0.3727and-0.2147, which are very low. Since2001the exchange rate pass-through elasticity of export price declining, while the exchange rate pass-through elasticity of import price increased firstly and then declined. China’s chemical and mineral products have a great exchange rate pass-through elasticity of export price, the machinery and electronic products, miscellaneous products, animal and plant products appear reverse pass-through. Animal and plant products have the greatest exchange rate pass-through elasticity of import price, mineral products and machinery and electronic products have the least. The exchange rate pass-through elasticity of export price to United States and South Korea are-0.3852and-0.1593, the exchange rate pass-through elasticity of import price to United States and South Korea are0.5346and0.1844. The exchange rate system reform has little impact on exchange rate pass-through elasticity of import and export price, which could be ignored. The empirical results show that China’s exchange rate pass-through elasticity of import and export price have symmetry.Secondly, the research for China’s exchange rate elasticity of trade balance includes the overall, HS classification, the major categories, the exchange rate elasticity with main trade partners, and symmetry of exchange rate elasticity. The results show that China’s trade balance exchange rate elasticity is0.4214, which does not meet the Robinsons-Metzler conditions, in short term depreciation of the RMB exchange rate cannot improve the China’s trade balance. In HS classification commodities only the third, fourth, fifth products and the mineral products meet the Robinson-Metzler condition. The exchange rate elasticity of trade balance with United States and South Korea are1.8673and0.2821. The exchange rate system reform has not improved the exchange rate elasticity, the effect is not obvious. China’s exchange rate elasticity of trade balance has symmetry.Finally, the research for China’s exchange rate elasticity of domestic prices includes import prices, producer prices and consumer prices. Single equation and ARDL models show that exchange rate elasticity of domestic inflation are-0.0262and-0.0142, the impact of appreciation of the RMB exchange rate on domestic inflation is very limited. Since2001the exchange rate elasticity of domestic inflation is increasing. S VAR model shows that China’s exchange rate elasticity of import prices, producer prices and consumer prices are-0.5339,-0.1448and0.0356. After the reform of exchange rate system exchange rate elasticity of import prices increased, but the producer prices and consumer prices declined.The research of this paper shows that China’s exchange rate elasticity of import and export prices are very low, high-tech products and resource products have poor competitiveness, low exchange rate pass-through cannot improve trade imbalances effectively, meanwhile the low exchange rate elasticity of inflation means use the exchange rate appreciation to deal with inflation is also inefficient. The reform of exchange rate system has little affect on exchange rate pass-through elasticity of import and export price, exchange rate elasticity of trade balance and exchange rate pass-through elasticity of domestic inflation. Therefore, we cannot use the exchange rate appreciation to solve China’s trade imbalance and domestic high inflation. China needs to deal with the problems of domestic economy from exchange rate regime, inflation targeting, keep the RMB exchange rate stability, maintain rapid economic growth, a various measures to control inflation five areas.