The Impact Of RMB Exchange Rate's Changes On Domestic Price

The prices and exchange rate are two of the core economic variables in a open economy. Under a regime of almost fixed nominal exchange rate , a country's domestic prices will not only reflect the internal fundamental factors' changes , but also affected by external factors' shocks. This paper aims at assessing the impacts of exchange rate on domestic price in China basing on "The Balassa-Samuelson Model". The paper suppose that the impacts of RMB exchange rate on domestic price include two parts : one is the impact of RMB nominal effective exchange rate's changes on domestic price ,the other is the impact of RMB internal real exchange rate's changes on domestic price ,meanwhile the changes of internal real exchange rate is derived from the changes of domestic relative labor productivity. Then we conduct a econometric test by means of cointegration and error correction model. The results show that in long run ,the domestic price is cointegrated with foreign price, nominal effective exchange rate, domestic money supply and domestic relative labor productivity. The changes of nominal effective exchange rate and the changes of domestic relative productivities both have significant influences on domestic price in the long term . Furthermore , the changes of nominal effective exchange rate has obvious effect on domestic price even in short term.