Empirical Analysis Of Impact Of RMB Exchange Rate Fluctuation On The Price Levels In China

On the July 21st 2005, the formalizing mechanism of exchange rate was reformed in our country. After the reform, the elasticity of RMB exchange rate has strengthened obviously. However, it is anticipated that the appreciation of RMB still exists in the international society.The strengthened elasticity of RMB exchange rate and the existence of RMB exchange rate appreciation in the future have brought certain extent of influence on the foreign trade, investment and consumption and so on in our country. With the further opening of exterior economy in our country, the fluctuation of RMB exchange rate will growing impact greatly on the China's macro economic, while the impact of RMB exchange rate on macroeconomic will never realize without the action of price level which is a intermediate variable. Therefore, it is significant to carry the research on the transmitting mechanism of RMB exchange rate how to affect price level and the efficiency of the transmission.As the theoretical basis for the article, this paper reviewed some theories about the interrelation between exchange rate and the price firstly.And then, from the perspective of macro and micro, it explored the transmission mechanism that RMB exchange rate affected Chinese price level. From the perspective of micro, RMB exchange rate fluctuation influences import prices through the channel of international trade, and then the price of import influenced price level in our country through cost, wages and substituting function of import merchandises and commodities made in domestic. From the perspective of macro, the RMB exchange rate fluctuation affected foreign exchange reserve first, and the changes of foreign exchange reserve affected the volume of basic monetary which was throwed in, and the supply of monetary affected the domestic price level ultimately.Next, this paper also analyzed the fluctuations of RMB exchange rate and the domestic price level, and then chosed monthly data from August 2005 to October 2010 as the total sample, with the help of methods such as Chow breakpoint Test ,Unit root Test, Cointegration Test and Impulse Response Function and Variance Decomposition, launched an empirical research on the short and long term RMB exchange rate transmitting efficiency of China's CPI and PPI, which is divided into two stages. Empirical results showed that there have been structural changes phenomenon about the transmition of RMB exchange rate since July 2005.From the perspective of long-term transmition, there was a long-run equilibrium relationship among RMB exchange rate, money supply, CPI and PPI in our country, in addition, RMB nominal effective exchange rate and currency supply on China's CPI and PPI influence all was significant statistically. Furthermore, the research also showed thatin the second phase the elasticity coefficient of RMB exchange rate that affected the CPI and PPI became lager, which just proved the fact that economic environment changed after the financial crisis of August 2008.Finally, based on the conclusions of empirical research, the paper draw the revelation that the monetary authorities should implement relatively stable monetary policy and China should relax the restriction on the RMB exchange rate fluctuation, and should improve the RMB formation mechanism reform furthermore and form a more flexible exchange rate system ect.