Price Transmission Of The Rmb Exchange Rate Changes And Their Impact On China's Trade Balance Of Payments Theory And Empirical Research

When we are debating whether RMB should be increased in value and at the time of refonnation in China's exchange rate system, this paper discusses the influences of RMB exchange rate changes on China's trade balance by the study of exchang rate pass-through. Although there are lots of studies about the relation of RMB exchange rate and China's trade balance, it is few disscusses about these influences, and its degree, and its process by the study of exchang rate pass-through.This paper combines theoretic and empirical analysis and extends the analysis model from only im-ex market to including the competition of domestic market. The influences of exchange rate changes on the price of goods (exchange rate pass-through) and consequently on trade balance, and the relationship of exchange rate pass-through and Marshall-Lerner conditions, all analyzed from only im-ex market extending to including the competition of domestic market.The theory analysis(chapter3) analyzes the influencing process and mechanism of exchange rate changes on trade balance from both exchange rate pass-through and Marshall-Lerner conditions based on the foreign and demestic literature summarization (chapter2). The coming into existence of Marshall-Lerner conditions only indicates the depreciation of exchange rate can improve trade balance, but the degree of improvement lies on the elasticity of exchange rate pass-through. Because the influences of exchange rate changes on the price of goods is incomplete, and it is different in different goods and different trade partners. There are limited influences of exchange rate changes on trade balance and different in goods & trade partners although Marshall-Lerner conditions coming into existence. there are influences not only the changes of import and export goods prices but also the changes of domestic consumer prices caused by exchange rate changes on trade balance. Generally, the exchange rate changes influence the price of import and export goods firstly, then the price of domestic products, lastly the price of domestic consumer goods(Jonathan McCarthy,2000). The series of price adjusting process requires a certain time after the exchange rate changes because of price rigidity. Along with the price adjustment, comes the quantity adjusting process of import and export goods, until the law of one price come into exixtence and recur to the equilibrium, the influences of exchange rate changes on trade balance disappeargradually.Chapter4 analyzes the changes of RMB exchange rate, price of goods, trade balance of China in recent years, which is a basic work, and a transition from theory analysis to empirical analysis. The description of these phenomenon is helpful to the validation and explanation the results of theoretic analyses and empirical analyses, and which makes the empirical analyses pertinent.Chapter5 and Chapter6 are empirical analyses, which adopt 2 steps parallel analysis, the same as the theory analysis, and analyze the influences of RMB exchange rate change and its pass-through on China's trade balance. Chapter5 estimates the elasticity of exchange rate pass-through in collectivety, different countries, different goods, and different periods use the foreign model for reference, and gets the results that the RMB exchange rate pass-through elasticity in import is greater than in export and domestic consumer price, and also different in countries, goods and periods. Chapter6 makes empirical analyses about the influences of RMB exchange rate changes on trade balance in collectivety, different countries, different goods, and different periods. and gets the results that the factors influencing trade balance are not only exchange rate changes, but also the inertia of import and export, the relative price, the quantity of industry production, and there are J-curve effect of the influence of RMB exchange rate changes on trade balance, but different in different countries, goods, and periods.Chapter7 analyzes the influence of RMB exchange rate changes and its pass-through on trade balance further through parallel analyzing the empirical results and conbining the price elasticities of import and export goods in demand and supply, the behavior of price to market, and hereupon summarizes all the conclusions. It bring forwards the corresponding opinion about how to settle the appreciation pressure of RMB, regulate trade balance, determine currency basket. Finally, it indicates the drawbacks and problems await to study in the next step.