Rmb Exchange Rate Changes On Prices And Asset Prices Affect The Empirical Analysis

Since 2000, especially after the day of July 21st,2005,when the People's Bank of China declared the RMB exchange rate appreciated against US Dollar by 2% and managed floating exchange rate would take the place of pegged exchange rate, the problem of RMB exchange rate pass-through has acctracted more and more domestic researchers' attention. One focus centers on how RMB exchange rate changes affect prices. Wether the appreciation of RMB exchange rate would do benefit to depress inflation? This is an inevitable problem faced by the central bank to implement monetary policy. Another focus is about how RMB exchange rate changes afftect asset prices. From the experiences of Japan, Gemany and Taiwan, we can see that the course of currcency appreciation is usually accompanied by the rocketing of asset prices. In fact, since the RMB exchange rate reform, stock price and house price have increased substantially. How would they react to the possible currency appreciation in the future?This paper aims to provide an answer to the above questions. The paper is composed of six chapters.Chapter one is an introduction which illustrates the research background, meanings, the structure of this paper, and research methods. This part makes a brief explanation on primary concepts used in the following chapters, and points out the main contributions and improvements to be done in the future.Chapter two is a summation on relevant research. This part reviews the literature on the effect of exchange rate changes on commodity prices and on asset prices. Previous research was generally carried on from two separate sides. This paper tries to unite the two sides from the monetary standpoint.Chapter three empirically examined the pass-through effect of RMB nominal effective exchange rate on domestic prices and the relevant determinants. First, this part makes a revision to Taylor's model (2000).Then, empirical research is carried on with monthly data of five indices——RMB nominal effective exchange rate, import price index, corporate commodity price index, comsumer price index and money suppy,from January 2000 to April 2009.This part aims to empirically analyze the effect of RMB exchange rate changes on domestic prices and its determinants and provide a therotical framework for central bank to implement exchange rate policy and monetary policy. Another purpose of this part is to compare the empirical results with previous conclusions.The empirical results show that, in the long run, the appreciation of RMB nominal effective exchange rate will lead to an increase of consumer price, although the effect is quite weak.The phenomenon that the appreciation of RMB nominal effective exchange rate is accompanied by the increase of consumer price became more obvious from the mid of 2006 to the first part of 2008.This conclusions differs from other domestic research. The paper puts forward an explanation from the standpoint of pass-through mechanisms of RMB exchange rate changes to prices. The analysis finds out that, the mechanism of money supply is the primary factor that affects the RMB exchange rate pass-through effect. Empirical data of recent years also show that the comovements of asset prices and commodity prices are getting more and more obvious.On the basis of chapter three, chapter four makes a further exploration and analyzies the effect of the change in RMB exchange rate expectation on domestic asset prices. The feedback mechanism between commodity prices and asset prices is also considered.Different from chapter three, indices used in this part are more closely related to financial markets, including the change in RMB exchange rate expectation which is measured by RMB NDF index, stock prick index, house price index and money supply M2. The choice of change in RMB exchange rate expectation based on RMB NDF out of the intuitive that it is a perfect representative of the expectation of investors in financial markets. The use of this index is an innovation of this paper.First, this part makes a revision on the asset portfolio model in order to analyze the interaction between exchange rate, commodity price, asset price and money supply under a theorectical framework. In the second section monthly data of relevant indices are used to examine the effect of the RMB exchange rate change on asset prices.The third section compares the main empirical results to previous research and presents a reasonable illustration for the main conclusions.This part finds out some interesting conclusions, including,The change in RMB exchange rate expectation will affect asset price.In detail, the expected appreciation of RMB exhcang rate will lead to an increase of stock price and house price. Furthermore, the stcok price reacts more quickly and more sensitively to the change in expected change of RMB exchange rate.There do exists an interaction between asset prices and commodity prices.Either in the long run or in the short run, the increase in asset prices will push commodity price up. In the short run, stock price has a more quick and larger effect on commodity price, while, in the long run, house price has a larger effect.The expected appreciation of RMB exchange rate can help decrease the inflation rate, although the effect is quite weak.In the interaction between indices, the mechanism of money supply is a principal factor that affacts asset prices.In chapter five this paper investigates experiences of some representative nations including Japan, Germany, and four southeastern nations in 1997 financial crisis. Japan and Germany both experienced currency appreciation during the period of high economic growth, so this paper pays much attention to the effect of the exchange rate change on commodity prices and asset prices and tries to clarify the role played by monetary policy.This part provides further evidence for the conclusions drawn by chapter three and chapter four. That is, for those sample countries, monetary policy played a crutial role in the effect of exchange rate change on commodity prices and asset prices, which is identical to the status quo in China.Furthermore, on the basis of analysis on international experiences, the paper also draws some useful lessons. First, when implementing monetary policy, central bank should pay much attention to asset prices and be allergent to asset bubles. The independence of both monetary policy and exchange rate poicy is fundamental. Exchange rate should be more flexible unless central bank is able to adjust it according to economic conditions.Chapter six presents conclusions and suggestions for the implementation of monetary policy and exchange rate policy in China.As to monetary policy, to control asset price bubles should be one of fundamental targets of central bank. Two measures can be adopted, the one being to moderately tighen monetarypolicy and decrease the growth rate of money supply, the other being to adopt structural monetary policy and credit policy in order to depress asset price bubles.As to RMB exchange rate, the pegged exchange rate against US Dollar should be adjusted, and the appreciation should be tuned to situations under the control of central bank. The appreciation of RMB real exchange rate, which can be achived by raising wages and other productions inputs prices, can be used to offset the appreciation of RMB nominal exchange rate.