Research On The Effect Of Rmb Exchange Rate Pass-through On Domestic Prices In China

In an open economy, exchange rate as a price of a currency relative to a nother country's currency, the changes will first lead to a change in domestic price level, and then have an important impact on the trade balance and other macroeconomic variables through the expenditure switching effect. Since July 21, 2005 exchange rate system reform, the RMB exchange rate showing a process of steady appreciation. According to Bank for International Settlements (BIS) from July 2005 to February 2010, under the trade-weighted nominal effective exchange rate,the cumulative appreciation of RMB is 12.55%, the RMB real effective exchange rate has appreciated 18.87%. In theory, the RMB appreciation can reduce trade surplus at the same time alleviate domestic inflation, however, it is not so simple. First, with the rapidly appreciate of RMB, the scale of China's foreign trade is growing, current account surplus continues to rise, and continue to refresh the record. This situation continued until 2009,, but considering that since 2009, the RMB exchange rate basically unchanged against the U.S.,obviously, the RMB exchange rate appreciation and the reduction of trade surplus is not directly related; Secondly, the RMB exchange rate appreciation can not effectively alleviate the domestic inflation,since the spring of 2007,inflation re-emergence,which disappeared for many years in China. And inflation pressure is increasing in China since 2010, the Significant differences between theory and reality requires us to think from a new perspective, this article from the angle of RMB exchange rate pass-through to the domestic price level , Implementing a comprehensive analysis of this issue.Firstly, this paper describe the economic phenomena of domestic inflationary pressure further increasing and the trade surplus rising on the context of revaluation of the RMB since the exchange rate reform on July 2005. This phenomenon as the background and starting point, this paper attempts to find a reasonable explanation from the perspective of exchange rate pass through; Secondly, through summarizing the theory of exchange rate pass-through and empirical study,this paper clarify status of the current study, pointing out the shortcomings at home and abroad about this issue, indicating future research direction; Thirdly, systematic exposition of the theory related to exchange rate changes affect domestic price level , a comprehensive analysis of exchange rates on prices of direct and indirect transfer pathway is implementing, then reviewing the change of RMB exchange rate system history. This lays a theoretical foundation for the following analysis; Fourthly, the paper refer to (Ito and Sato, 2006 and McCarthy,2000)The structure of the framework of vector autoregressive model. After the unit root test, cointegration test and Granger causality test, transmission elasticity of exchange was estimated through the structural VAR model; Fifthly,,after studying the relationship between exchange rates and prices based on the literature, this paper proposed an testing hypotheses which is ignored in empirical research in the past,: the paper proposes the hypothesis of volatility spillover effect of exchange rate growth uncertainty on import inflation uncertainty , and then test s the hypothesis through multivariable GARCH model by using Chinese data; Sixthly, use nonlinear modeling method of nonlinear smooth transition regression model to study the nonlinear relationship between exchange rate and domestic prices; Finally, on the basis of the RMB exchange rate pass-through effect,some policy implications is proposed to the current macroeconomic issues (such as inflation, exchange rate reform).The empirical results show that: First, Overall, the RMB exchange rate appreciation have a greater contribution in reducing domestic import price, producer price and consumer price. This shows that the appreciation of the RMB exchange rate to ease domestic inflationary pressures for a certain effect. Moreover, control money supply growth and to maintain appropriate growth of the economy also helped reduce the level of inflation. In addition, the RMB exchange rate have a greater transmission rate on import prices, so by changing the exchange rate to adjust China's trade balance has a certain extent effect, but the expenditure switching effect of exchange rate also depends on the size of the imported goods elasticity of demand and other factors. Comparing the impact of various changes before and after the exchange reform on the producer price and consumer price in the explanatory power, we found that after the reform the RMB nominal effective exchange rate shock on the producer price and consumer price changes have greater explanatory power; In addition, before the reform, the exchange rate appreciation caused the initial producer price and consumer prices rose slightly,the reason may be that before the reform,China's international balance of payments continued to "double surplus" and the market formed strong expectation of RMB appreciation, a large number of short-term capital flow into China. Finally, we found that classification of exchange rate pass-through to different consumer prices to different extent. Secondly, there Is some effect volatility spillover of exchange rate growth uncertainty on import inflation uncertainty This means that exchange rate uncertainty can provide information of import price inflation uncertainty. Finally, the nominal effective exchange rate of RMB showing a clear asymmetry on PPI,with a strong dynamic non-linear transfer characteristics, nominal effective exchange rate has a asymmetric state impact on the producer price.The result not only provide a reasonable explanation for the imbalances of trade balance in context of RMB appreciation,but also provide some new policy implications for China's current macroeconomic problems:First, to control inflation,appreciation of the renminbi has a role,at the same time, curbing inflation should be multi-pronged approach; second, by changing the exchange rate taking advantage of the expenditure switching effect to adjuste the trade imbalance has some maneuverability; second, in the short term, should keep RMB stable,appreciation should follow the small, progressive principles; third, improve the RMB exchange rate formation mechanism on the basis of existing RMB exchange rate mechanism in our country and furtherly enhance the flexibility of exchange rate system, timely enlarge the exchange rate floating range,the RMB exchange rate should remain change within reasonable limits, rather than rigid unilateral appreciation to reduce appreciation expectation so as to reduce speculative capital inflows; fourth,incomplete exchange rate pass-through to domestic prices has created conditions to promote market-oriented reform of RMB exchange rate formation mechanism; fifth, incomplete exchange rate pass-through provides a new theoretical foundation.in the selection of future exchange rate system.