Study On Incomplete Pass-through Of The RMB Exchange Rate Fluctuation, Trade Balances And Employment

According to Jayant Menon's defination, Exchange rate pass-thorugh definates how degree of the exchange rate fluctuation brings to the change of the import and export good prices which are priced with the currcency in the destination of the traded goods. The complete exhange rate pass-through describes that one unit of exchange rate fluctuation brings to the same degree of the fluctuation to the traded prices, contrarily, the exchange rate pass-through is imcomplete. According to the purpose of this paper, we fefine the RMB exchange rate pass-thorugh as follows, how degree of the the exchange rate fluctuation of RMB brings to the change of the import and export good prices which are priced with RMB and the change of the domestic prices. Many phenomenas at home and abroad indicate that exchange rate pass-through is always imcomplete, which is beyond the explanation of the traditional macroeconomics.The traditional macroeconomics which overlook the fact that exchange rate pass-throgh is imcomplete can't give us the reasonable explainations on the economic phenomenas with imcomplete exchange rate pass-through.The concept of exchange rate pass-through was put forward by Dornbusch and Krugman in 1987 for the first time.Many realted academic researches came into being afterwards. The researches focused on the size of the exchang rate pass-through initially, then researches on the influencing factors of the exchang rate pass-through appeared. The research visual angle evolves from microcosmic aspect including industrial organization, market structure and price discrimination to macroscopic aspects, such as inflation environment and the degree of opening.Compare to the overseas, related acadimic researches on this topic were delayed. There are few domestic researches on RMB exchange rate pass-through before July in 2005, ater that, the research topic on RMB exchange rate pass-through has been paid more and more attention. The study on this topic is immature although more and more study fruits have been produced in China. My doctoral dissertation pushes on the researh as follows.The doctoral dissertation include eight chapters in all. The first chapter is introduction.The second chapter mainly explores the impacts of RMB exchange rate fluctuation pass through to prices and the trend of development of the pass-through. The third chapter deepens the second chapter, which deduces the exchange rate pass-through model and the theory of asymmetry exchang rate pass-through and then study the asymmetry of the RMB exchang rate pass-through. The meanings of the asymmetric exchange rate pass-through for RMB include two aspects. One is that the degrees of pass-through to import prices effect are different for one unit of RMB depreciation and one unit of RMB appreciation. The other is that the degrees of pass-through to import prices effect are different for large change of RMB exchange rate and small change of RMB exchange rate. China's import prices index as explaining variable is built in the third chapter in order to study the asymmetric exchange rate pass-through directly. The fourth chapter analyses the relationships between RMB nominal effective exchange rate fluctuation and the domestic and import prices since July in 2005, when RMB exchange rate reform was made. Why I solely study RMB exchange rate pass-through after RMB exchange rate reform was made in July,2005.the reasons as follows, firstly, as a regime change, the RMB exchange rate reform is deserved studying. Secondly, RMB appreciation expectation is very strong sinc July,2005, and China's Macroeconomy was in dilemma. That's to say, RMB appreciation expectation coexists with inflations. From micro-perspective, Chapter five makes researches on the relationships between exchange rate fluctuation and each industry based on sub-level goods, in this chapter, Not only exchange rate pass-through coefficients for each industry are obtained, but also the speed of the exchange rate fluctuation passing to import prices for each industry. Chapter six explores the relationships between the change of RMB exchange rate and trade balance of China from the point view of exchange rate pass-through.Chapter seven analyzes the impact of RMB exchange rate fluctuation on china's employment. The last chapter, chapter eight presents the conclusions as follows.Firstly, the lowing exchange rate pass-through provides conditions for boosting RMB exchange rate pricing mechanism market reform steadily.Secondly, the study on imcomplete exchange rate pass-through provides new theory basis for the tropism of the living foreign exchange rate system and the choice of the future exchange rate pass-through.Thirdly, china's exchange rate pass-through effect is on the downward trend. Considering the independence and transparence of the central bank will be gradually improved, and with the central bank's ability to control Macroeconomy strengthening and the impact of the distribution cost on exchange rate pass-through effect widening, we expect that the RMB exchange rate pass-through effect will be on the downward trend or will keep basically stable. In this sense, the condition is ripe for implementing inflation targeting regimes in china, monetary authorities should pay more attention on the change of domestic prices, and pay less attention on the change of exchange rate. Monetary authorities can consider making inflation targeting regimes plan.Fourthly, the function to control inflation by exchange rate fluctuation is limited, we should use so many ways to deal with inflation, meanwhile,building monetary policy coordination mechanism is also needed.Fifthly, the exchange rate pass-through effect on the import prices by RMB exchange rate fluctuation is on downward trend, which shows that the function to adjust economic imbalances by exchange rate is limited. We can discuss in two aspects, one is the function to adjust economic imbalances is limited, the other is the function to stable domestic prices through import prices by RMB exchange rate appreciation is also limited.Sixthly, the effect degree of the RMB depreciation pass-through to import prices is higher than RMB appreciation,which shows that the import trade structure is abnormal and the absence of discourse power of China in international imports maret.Seventhly, the larger size is the changes in RMB exchange rate, the greater effect is the pass-through to import prices. This conclusion provides important apocalypse for advancing RMB exchange rate reform. It's easy to know that advancing the reform the rate-forming mechanism of RMB steadily requires stable macroeconomic environment, especially the price environment. Generally speaking, Jacobinical reform of the exchange rate regime is easy to wreck the equilibrium of the macroeconomy, and easy to trigger violent fluctuation to the real economy and the financial economy. The degree of the exchange rate fluctuation and the pass-through effect are positive, which indicates that in the manner of steady and progress step by step to advance the rate-forming mechanism of RMB is the fundamental principle. on the contrary, the one-off, and jacobinical manner to the reform will trigger violent fluctuation to the import prices and destruct the stable price environment.eighthly, the effects of the RMB exchange rate appreciation and depreciation on trade balances are asymmetric, that is to say, there are almost no effects on the trade balances of the primary goods, industrial goods and gross goods with the RMB exchange rate appreciation, and there are significant effects on the trade balances of the industrial goods and gross goods with the RMB exchange rate depreciation, but there are no effects on the trade balances of the primary goods. There are almost no effects on the net imports of the primary goods with RMB exchange rate changes because of the rigid demand for primary goods such as metal mineral sand, coal and oil, and the scarcity for making a price to scarce resource in international market. Besides, the RMB exchange rate depreciation deteriorates, the trade balances of the industrial goods rather than increasing the net imports, because the import and export demand elasticity is very small for mechanism and transportation goods which are dominant in the industrial goods.Ninthly, It is useful to develop china's economy and advance social employment by keeping RMB real effective exchange rate stable relatively. RMB real effective exchange rate appreciation have a negative impact on social employment in the period of slowing economy development, because the effect of revenue and the effect of trade income and expenses exceed the price effect of the capital. Due to China's growth model of export-orientation and export goods dominated by labor-intensive ones, the export enterprises absorb abundant social labor force, it is useful to boost employment of the export enterprises and the whole social employment by keeping RMB real effective exchange rate stable relatively.Tenthly, eliminating the RMB appreciation expectation is good to keep social employment stable. I find that the price effect of the capital of the RMB appreciation is useful to boost social employment since July,2005, when RMB exhange rate reform was taken. Howerer, the permanent RMB appreciation expectation may come to the real wide appreciation, when the effect of revenue and the effect of trade income and expenses exceed the price effect of the capital. As a result, the whole social employmnet will be pressed. China should draw lessons from Japan which suffered a lot because of the exchange rate appreciation. Besides, China should not continue to monitor the capital flows until the domestic financial market is ripe, then realize floating exchange rate regime, which is in favor of stabling exchange rate and eliminating appreciation expectation.