Study On The Exchange Rate Pass-through Effect On The China's Inflation

Foreign exchange rate is a vital variable which influences the balance of ex-economy and im-economy. In recently years , along with china's economy steadily develop, foreign trade surplus and foreign exchange hive went on increasing, Renminbi has always in the presssure of appreciation.In the situation of Renminbi appreciation, china's price level went up, and taken on the characters of inflation. So whether Renminbi's appreciation has restrained the inflation,and how is the effect?On the basis of above questions, this paper adopts the critreion method and the demonstiation method.one side, the paper impersional introduce the exchange rate pass-through domino effect theory in the criterion. 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.By right of the above methods, the paper analysies renminbi's beasts in the period of before and after the exchange rate reformation, and the reason why renminbi appreciation. At the same time,in allusion to china's inflation pressure recently. This paper probes into china's price level changing and the mostly factors of pushing the price level. On the basis of the present literatues, the paper studies if the nominal effective exchange rate influenced the inflation, and using the data of 2003-2007 to check up it.From the demonstration test,we can conclude that before the year of 2005, when it hasn't conducted the exchange rate reform, the appreciation of renminbi has influenced the CPI and PPI. But in the later years, Renminbi appreciation didn't have long influence on CPI. It only influence PPI in long time. And we can conclude that Renminbi appreciation has restrained the inflation, but its action is not very big. So to settle china's inflation recently, the government should put more attention onto other policy rather than exchange rate policy.Through demonstrational test, we found that before 2005,the year of exchange rate reformation, exchange rate has pass-through effect on CPI and PPI. But after the exchange rate reformation, foreign exchange rate only has impact on PPI, and its action is fiant. its restrational effect on china's inflation is low, and the length of restration is short. So we can conclude that recent Renminbi's appreciation has restrational effect on china's inflation, but impact is low. And the exchange rate has more impact on PPI than CPI.The reason for this phenomena maybe that the exchange rate changing influences import price level first, and then the wholesale price level, the last is CPI.And because exchange rate changing doesn't marry again onto the import price entirety. Import semi-finished product is only one part of the finished product, so exchange rate changing's impact on CPI is degressive. So this wakens the affect of exchange rate changing on CPI. 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.