Research On The Effect Of RMB Exchange Rate Pass-through On Domestic Prices Before And After The Exchange Rate System Reform

Foreign exchange rate is a vital variable which influences the balance of ex-economy and in-economy. In recently years, along with China's economy steadily develop, international trade surplus and foreign exchange hive went on increasing. This cause RMB in the pressure of appreciation. In the situation of RMB appreciation, China's price level went up, and taken on the characters of inflation. So whether RMB's appreciation has restrained the inflation, and how is the effect?On the basis of above questions, this paper adopts the criterion method and the demonstration method. One side, the paper impersional introduce the exchange rate pass-through domino effect theory in the criterion, and On the other side, the paper adopts the demonstration method to study if the exchange rate changing has influenced China's inflation. When study the theory,the paper put more attention on praciticability in order to offer gist to our government to constitute policy and reform system.First, the paper summarizes the main Pass-through theories, and observes the fluctuations of RMB exchange rate and China's CPI from 1994 to 2010.Then we conduct an empirical study by means of co-integration and vector error correction model, using monthly data from January 2001 to October 2010.The results show all the six variables are co-integrated in the long run, while the effect of RMB exchange rate pass-through on China's CPI is weak.The major factors that influence China's CPI include CPI itself. Corporate goods price index(CGPI), and money supply. So we can conclude that recent RMB's appreciation has restrational effect on China's inflation, but the impact is low. So to solve the inflation pressure, we should put more attention on other policy rather than the exchange rate policy. In the end, the paper offers countermeasures on the basis of the study result.