The Impact Of RMB Exchange Rate Change On Domestic Prices

Relationship between exchange rates and prices in international economics has been a hot topic, and the macroeconomic impact of the two scholars is also a public hot spot. With the globalization of economics and finance, the exchange rate as the connection link of national economies. It also has an increasingly profound impact on the on a country's external balance and internal economic balance. The transmissions of exchange rate fluctuations are usually penetrate into the micro and macro economy from the outside and the internal operation of an open economy.In the early perfect market assumption, the exchange rate transfer to prices completely, namely: if the price in the domestic currency does not change, the volatility of the exchange rate will deliver 100% of the price to export commodities. With further research on the exchange rate pass, scholars have put forward that exchange rate transmission to price is incomplete with the angle of the micro and macro factors of the exchange rate incomplete pass-through, and the interaction of macroeconomic and monetary policy under the new macroeconomic framework.Proceeding from the actual situation in China, China launched another reform of the RMB exchange rate formation mechanism that we will implement a managed floating RMB exchange rate system from the July 21,2005, after the Asian financial crisis. From the international financial crisis in July 2008, RMB trading band against the dollar initiative to narrow again to avoid the spread of the crisis, since the cumulative rate of RMB against the dollar is more than 18% of the appreciation cycle for 3 years. As China's strong recovery in economy in 2010 under the impact of the crisis and its resumption of exports growth, the central bank decided to further promote the reform of RMB exchange rate formation mechanism in 19 June,2010, which strengthens the flexibility of RMB exchange rate. With the improving of RMB exchange rate market, it's a very important practical significance that we analyze the impact of exchange rate volatility on the transmission mechanism of exchange rate fluctuations and the effect (the length of time, transfer degree). It also provides a theoretical basis to government's macro-control.The first part of the research elaborates the background and significance and summarizes the different stages of the formation mechanism of RMB exchange rate system. The second part review literatures of the incomplete pass new development under the traditional and new macroeconomic framework. The third part described the theoretical model, direct and indirect transfer mechanisms, and the price under different exchange rate transmission mechanism. The fourth part is empirical, based on monthly data from August 2005 to December 2010; study the transfer effect of the RMB nominal effective exchange rate, import prices, GDP, money supply rate on the domestic price level (CPI, PPI, and RPI). Evidence obtained by the RMB exchange rate has a positive role in transmission of prices. The appreciation of RMB cannot eliminate domestic inflation. Finally, the article gives the corresponding policy recommendations.