| The RMB exchange rate has a profound impact on prices through two different perspectives of international trade and international capital flows.The former is the exchange rate pass-through on commodity level,while the latter is the exchange rate pass-through on currency level.The exchange rate itself has a dual attribute of parity and leverage,where the parity attribute refers to the determination to the exchange rate by the macroeconomic variables,and the leverage attribute refers to the impact to the macroeconomic variables by the exchange rate.This paper classifies the theoretical basis and the related literatures of equilibrium exchange rate and exchange rate pass-through,summarizes the changes of RMB exchange rate system and the price fluctuation with the policy response by Chinese government,analyzes the change of RMB exchange rate by using the equilibrium exchange rate theory,and analyzes the exchange rate pass-through in China through different mechanisms from the perspective of international trade and international capital flow.This paper classifies the relevant theories and literatures on both equilibrium exchange rate and exchange rate pass-through,and summarizes the theoretical research and empirical analysis of the two aspects.In the study of equilibrium exchange rate theory,there are five main theoretical frameworks.Purchasing Power Parity(PPP)theory is first but ignores the interpretation to short-term exchange rate,which means a large limitation.Equilibrium Real Exchange Rate(ERER)theory and Natural Real Exchange Rate(NATREX)theory are more demanding on data and less operable.Fundamental Equilibrium Exchange Rate(FEER)theory has harsh assumptions and cannot reflect the influence of the economic behavior on the exchange rate.Behavioral Equilibrium Exchange Rate(BEER)theory is highly operational,and its theoretical framework is more complete to cover the impact of exchange rate equilibrium in the long-term,short-term and stochastic factors.In the empirical study of equilibrium exchange rate estimates,foreign scholars have generally accepted that the RMB exchange rate during the sample period was underestimated to a high degree,while the domestic scholars concluded that the low degree of underestimation.In the study of exchange rate pass-through,the earliest Traditional Open Economy Macroeconomics laid the initial theoretical foundation for the study of exchange rate pass-through,and later developed the perspective of Microeconomics and the perspective of New Open Economy Macroeconomics.The latter two are based on the theory of Traditional Open Economy Macroeconomics,discussing the limitations of the theoretical framework,and put forward the micro or macro factors which traditional theory ignored,and then study the impact of these factors on exchange rate passthrough.From the perspective of Microeconomics,scholars put forward the different ideas of the existence of non-tradable goods,the influence of pricing strategy and the influence of price sticky.The scholars in the New Open Economy Macroeconomics pay attention to capital flow,inflation environment and economic cycle influences.In the empirical research on exchange rate pass-through,the empirical research literature so far is mainly on the developed economies.There are few studies on emerging economies,and the research on China has increased since the reform of RMB exchange rate.In the empirical method used in the empirical study,the earliest single-equation regression method is now rarely used since the limitations of the variables.The main analysis methods are based on VAR model in recent years.In the empirical research on the RMB exchange rate pass-through,most researches are on the ideas under the international trade framework.Few studies on the use of international capital flow framework.Especially,the comparative researches are even much less.This paper summarizes the changes of RMB exchange rate system and the price fluctuation with the policy response by Chinese government.The reform of the RMB exchange rate system is the result of the double impact of China's economic system reform and international monetary system change.The reform logic followed by the former is from the plan to the market,and from closed to open;the latter follows the trend of change from fixed to floating,and from single to plural.In addition,the marketization is the direction that RMB exchange rate system reform always sticks.This reform route can be summarized as a reform from multi-track to single-track,from a single pegged to the dollar to "a basket of currencies",and from fixed to floating.This paper summarizes China's price changes and governance process,that the formation logic of China's inflation and deflation cycle is universal and specific.In universal terms,investment overheating is often the common characteristics of the inflation,and the external shock is often the common reason for the deflation.In specific terms,the price volatility of some basic products,including food and industrial consumer goods,will lead to specific structural factors,which are important incentives for inflation and deflation.In addition,some factors with special reforming background will also lead to inflation.This paper constructs an equilibrium exchange rate model,which holds that the RMB equilibrium exchange rate is determined by the interest rate and capital flow in the short term.The rises in interest rate and the net capital inflow lead the appreciation of the exchange rate.In the medium and long term the RMB equilibrium exchange rate is determined by the purchasing power parity,trade barriers and capital controls.The rise in productivity and the decline in inflation will increase the purchasing power of local currency,while the rising purchasing power of the currency,trade barriers and the rising capital controls will promote the appreciation of exchange rate.Based on the theoretical model,the short term and mid-long term factors are summarized as four factors.This paper uses co-integration equation to calculate the RMB equilibrium exchange rate against the US dollar from 1998 to 2014,which verifies the positive impact of the relative productivity and net foreign assets,and the negative impact of economic openness and money supply on the RMB equilibrium exchange rate.This paper then analyzes the logic of the RMB exchange rate changes from 1998 to 2014 from the perspective of the deviation degree between real and equilibrium exchange rate,finding out the impact of the international financial crisis,the change of the domestic and international system,the volatility of the economic policy,and the economic cycles on the RMB equilibrium exchange rate.This study also discovers the fact that the RMB exchange rate is not flexible.In addition,this paper analyzes the reasons for the devaluation of the RMB since 2014 using the equilibrium exchange rate framework,and points out that the recent devaluation of RMB is due to the decline in the capital inflows in China since 2012,the expectation of Federal Reserve rate hike,and the relatively loose monetary policy of the People's Bank of China.Based on the equilibrium exchange rate analysis framework,this paper makes three judgments on the future of RMB exchange rate.First,the RMB exchange rate has devaluation pressure in the short term,but the depreciation will not be substantial.This is joint decided by our relatively stable current account surplus,relatively abundant foreign reserves and relatively stable neutral monetary policy.Second,the RMB exchange rate will remain relatively strong in the mid-long term.This is because China's potential economic growth is still relatively higher than most foreign countries,commodity trade competitiveness is still strong,and the current gap between China and US economic cycle will gradually narrow after the Federal Reserve rate hike.Third,the space,amplitude and speed of RMB appreciation in the future will be reduced.This is decided by a group of trends in China,such as the continuous growth of China's foreign investment,the opening of the RMB capital account,the potential slowdown in economic growth as well as labor productivity growth,and the rising labor costs.This paper constructs a theoretical model of exchange rate pass-through from the perspective of international trade,dividing the main variables of RMB exchange rate passthrough into five aspects: RMB exchange rate,import price,price,economic scale and money supply,and uses VAR model to do empirical analysis on the effect of exchange rate passthrough.The study found that the change of RMB exchange rate significantly affected the price level of China through the price of imported products,proving that the import price was an important channel for the exchange rate pass-through on the commodity level.There are negative influences of exchange rate on both import price and the overall price level.And there is positive influence of import price on the overall price level.This shows that the exchange rate pass-through from the perspective of international trade is consistent with the traditional macroeconomic theory.The study also demonstrates that the perspective of international trade is not the only mechanism for the exchange rate pass-through of RMB by comparing the explanatory power of variance decomposition and the lag of impulse response function.This empirical analysis shows that China is currently experiencing macroeconomic changes as "the trade transformation and the industrial restructuring promoted by the consumption upgrade”.The consumption structure upgrades from the low-end single form to high-end diversified form,leading to the transformation from export-oriented trade to balanced trade,as well as the expansion of the proportion of the tertiary industry and the transformation and upgrades of the first and second industry.This paper constructs a theoretical model of exchange rate pass-through from the perspective of international capital flow,and summarizes the main variables into six aspects: RMB exchange rate,capital inflow,price,money supply,real estate price and stock price,then using VAR model to analyze the exchange rate pass-through effect.It is found that RMB exchange rate has an impact on money supply through capital flow,then makes an influence on asset and consumer prices,proving that the capital inflow is the important channel of RMB exchange rate pass-through from the perspective of international capital flow.In addition,the exchange rate expectation and the central bank's monetary sterilization are key factors.The empirical results show that the exchange rate expectation affects the capital flow,resulting in changes in the direction of capital flows over time.The central bank's monetary sterilization will reduce the money expansion brought about by the capital inflow,thus weakening the exchange rate pass-through.This effect appears in the mid-late stage after the shock of capital inflow.This paper proves that the impact mechanism of capital inflow on price has different dominant factors and operational logic in the short and long term,mainly through the capital inflow to assets market,and then indirectly through the different effects of asset price to consumer price.Capital inflow mainly moves into the asset markets,pushing up asset prices.In the short-term The Crowding Out Effect dominates,asset prices up expectation crowds out the consumer market funds,triggering consumer price fell.In the long-term The Wealth Effect dominates,asset prices brought residents to accumulate wealth,thus expanding consumption led to price increases.Therefore,in different macroeconomic environment,the impacts of exchange rate on consumer price through asset price from perspective of capital flow are different,or even opposite,thus effectively explaining the paradox that the theory and the fact of exchange rate pass-through in China are inconsistent recent years.This paper also analyzes the differences and reasons of the different asset prices in exchange rate pass-through by comparing the impulse response functions.Real estate has the dual attributes of investment goods and necessities,which are more powerful as the capital reservoirs and have wider influence in the economy,so The Wealth Effect is stronger and the capital-driven characteristics are more obvious.The stock market is influenced by policy.Its short-cycle effect is stronger,so the release of The Wealth Effect is more changeable.This paper puts forward a series of policy suggestions at the end of the study.First,firmly promote the reform of the RMB exchange rate system in the principle of active,gradual and controllable.The first is to establish a market-led flexible exchange rate system;the second is to adhere moderately guide and intervention to the RMB exchange rate;the third is to avoid the high dollar set in "a basket of currencies",and to adjust the weight of the various currencies regularly;the fourth is to keep careful in promoting the process of internationalization of the RMB.Second,properly deal with the impact of exchange rate on China's import.On the one hand,the import enterprises should actively adopt various tactics to avoid the exchange rate risk in the transaction and take the initiative to carry out strategic transformation to maintain their own advantages in the adverse exchange rate environment.On the other hand,the government should continue to promote the adjustment of industrial structure,thus upgrading the trade structure.In addition,the government should formulate relevant policies to ensure the security and price stability of the import goods,which have strong relationship to the people's livelihood.Third,actively expand domestic demand and retain domestic demand dividends.To expand domestic demand,the first is to reduce the gap between rich and poor through the income distribution system reform;the second is to improve the consuming will by enhancing the social security system.To retain domestic demand dividends,we must rely on the SupplySide Structural Reform,the first is to promote scientific and technological innovation and to improve the quality of products and services;the second is to encourage the development of small or micro enterprises,improving the personality of product and service.Fourth,take comprehensive measures to prevent capital outflows.The first is to enhance the flexibility of the RMB exchange rate;the second is to strengthen the monitoring and early warning of capital flows;the third is to strengthen the approval of corporate foreign investment;the fourth is to crack down on illegal transfer of funds abroad;the fifth is to compress offshore RMB supply;the sixth is to use Tobin tax at the right time;the seventh is to take administrative means to carry out strong intervention to the market in the situation of serious capital outflow.Fifth,the construction and improvement of assets market.Steadily promote the stock market reform.The first is to cultivate institutional investors and to strengthen investor education;the second is to reform the stock market trading system,implementing the T+0 transactions;the third is to strengthen market supervision and protection of investors;the fourth is to construct the multi-level capital market quickly.For the real estate market,we should resolve the real estate bubble and promote the real estate to the return of residential properties.The first is to strengthen the supervision of the real estate market;the second is to establish a real estate market monitoring system;the third is to strengthen land resource management;the fourth is to adjust the credit scale and direction.Sixth,study and grasp the relationship between exchange rate and price in order to stable domestic prices in the exchange rate changing time.The first is to appropriately reduce in import tariffs;the second is to appropriately liberalize the import control of some commodities;the third is the implementation of trade diversification strategy;the fourth is to strengthen market supervision;the fifth is to prevent asset prices from hard landing;the six is to stop speculation in food and means of production;the seventh is to guide the flow of funds reasonably.Seventh,accurately identify the price fluctuations in the formation of logic,flexible use the general policy and special policies,and targeted to control prices.The general policies include the use of tightening measures to manage inflation,and the use of stimulating measures to deflation.The introduction of special policies should depend on the nature of inflation and deflation.There have been three kinds of nature of inflation after China's reform and opening up,which are demand-driven,cost-driven and structural inflation.There have been two types of deflation,respectively,external-demand-decline and structural deflation. |
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