Empirical Analysis Of Impact Of Exchange Rate Fluctuation On Price

1. Main contentWith the development of economic globalization, the economic connections between countries is closer and closer, exchange rate, as two countries'currencies nominally price parity , play the association part in world economy. At the same time, international currency regime has entered the floating rate era since the Breton Woods regime disassembly, exchange rate fluctuation becomes the constant state characteristic in the foreign exchange market. Therefore, the study of the impact of exchange rate fluctuation on price has important theoretical and practical meaning for economists, the governments, enterprises and so on.Prices and exchange rate are core economy variables in open economy, are two variables that also have extremely close relationship. In history of exchange rate development, both investigation and discussion of the relation between prices and exchange rate prices appears among them, but price just appears as the exclusive factor. Just as the nominal exchange rate getting rid of prices get actual exchange rate concept, thereby exchange rate can reflect one country'competition ability better. The first time that made people have break-through on exchange rate and the prices relation is Kassel (G.Cassel), the Purchasing Power Parity theory, 1916, the One Price Rule made exchange rate and price collected closely first time. On the other hand, the existence of many fixed exchange rate countries make the real exchange rate trend research equal the domestic price trend research to some extent, so to this fixed exchange rate countries, the change of real exchange rate is shown by the change of domestic price.In the fixed exchange rate regime, domestic price is not only affected by the basic economic variables, but also influenced by the outer infectors. The research object of this paper is to reveal the influence of exchange rate on domestic price. Firstly, this paper demonstrate the basic logic relationship between exchange rate and price, then use ADF Test, Co-integration Test and Error Correct Model to investigate the influence of exchange rate on domestic price. The results show that domestic price, oversea price and Renminbi nominal effective exchange rate are Co-integrated in the long run. Nominal effective exchange rate has notable influence on domestic price, the influence is not absolute, and time lag exists.If China is still under fixed exchange rate regime, the impact of exchange rate fluctuation would be obvious, because exchange rate can not act as the price indicator, the offset will make price fluctuate acutely, floating exchange rate regime is a better choice.2. Main frameChapter one reviews the relationship between exchange rate and price, in general, there are two kinds of relationship between exchange rate and price: first, exchange rate and price are determined by outer variables; second, there is cause and result relationship between them. Then analyze influence of exchange rate on domestic price under different exchange rate regime, finally conclude with One Price Rule.Chapter two reviews history of Renminbi exchange rate, firstly, analyzes Renminbi exchange rate regime and Chinese exchange rate policy: 1981~1984: official exchange rate and trade inner settle price coexist, 1985~1993: official exchange rate and exchange adjust price coexist, 1994~2005: managed floating exchange rate regime, after 2005: floating exchange rate regime referring currency basket.Chapter three is the demonstration analyze of influence of exchange rate on domestic price. First confirm the variables: CPI, PPI, NEER, then use ADF Test, Co-integration Test and Error Correct Model to investigate the influence of exchange rate on domestic price.Chapter four analyzes the results of the model: domestic price, oversea price, and Renminbi nominal effective exchange rate are Co-integrated in the long run. Nominal effective exchange rate has notable influence on domestic price, the influence is not absolute, and time lag exists.Chapter five brings forward suggestions, in the long run, the fundamental solution is to advance constructible innovation, complete Renminbi exchange rate regime, adjust exchange rate. 3. ContributionsThis paper uses financial time sequence to analyze influence of exchange rate on domestic price, combine qualitative analysis and quantitative analysis well, the contributions of this article are:3.1 Adopting One Price Rule as the theoretical basis, this paper analyze influence of exchange rate on domestic price, explain the relationship between exchange rate and price to some extent.3.2 This paper takes data of 16 countries including China in 21 years, scope of sample is wide, data are abundant, and the conclusions are persuasive.3.3 Adopting ADF Test, Co-integration Test and Error Correct Model to investigate the influence of exchange rate on domestic price. The results show that domestic price, oversea price, Renminbi nominal effective exchange rate are Co-integrated in the long run. Nominal effective exchange rate has notable influence on domestic price, the influence is not absolute, and time lag exists.In a word, by assembling lots of useful data, setting the econometric model to analyze the influence of exchange rate on domestic price, this article gives some suggestions for the Renminbi exchange rate innovation.