The Impact Of Exchange Rate Volatility To Inflation

China has reformed the RMB exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies on July 21, 2005, since when the exchange rate volatility has become strong. While the CPI acess to a rapid increase in phase. driven by significant increases of food prices, inflation has indeed become a real problem that cannot be avoided in economic life. Many Scholars China's think that the undervalued exchange rate is the root cause of the current inflation, so the research of how to decide the direction of RMB exchange rate.This article is precisely on this basis to discuss china's exchange rate system in different periods and the inflation situation, and probes into china's price level changing and the mostly factors of pushing the price level On the basis of the present literatures, the paper studies if the nominal effective exchange rate influenced the inflation, and using the data of 2005-2008 to check up it.The paper is divided into six chapters.Chapter 1 is the introduction including topics' background and significance, literature review, the papers' innovation and shortcoming. First it describes the theoretical study and analysis for countries to choose fixed or floating exchange rate in the context of economic globalization, and secondly summarize the latest progress in academics at home and abroad on the current exchange rate pass-through research and point out that China's research in this area is relatively low to be further enriched and developed. Finally, do a brief introduction to this article's innovations and shortcomings.The second chapter is the introduction of exchange rate pass-through, concentrated in its analysis on the theoretical framework. Exchange rate pass-through take effects to inflation by the conduction to prices ,which is divided into complete and incomplete pass-through. The earliest studies on the relationship between exchange rates and prices began in Kassel's theory of purchasing power parity. this paper started from the theory of purchasing power parity, and further based on the introduction Mundell - Fleming Model theoretical framework and based on the overshoot of the theoretical analysis model. Theoretically describe the exchange rate and price relationship between the transmission.Chapter 3 analyzes the changes of china's exchange rate system in different periods for different economic development needs, at the beginning of China's reform and opening up we implemented official dual exchange rate system, then we go through 1994 market-oriented exchange rate system reform, begin to carry out a managed floating exchange rate system based on market supply and demand . with the economic development and financial globalization, in July 2005 China was introduced to a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. By comparing the analysis, we can see our country becoming to imply more flexible exchange rate system, provided good conditions to a healthy and stable development of economy.Chapter 4 analyzes the measure of inflation as well as the inflation of different historical periods in China, focusing on analysis of the four times inflation since the beginning of reform and opening-up about the causes and their respective characteristics and governance measures, such comparative analysis provide some reference to China's 2007 inflation governance.In chapter 5, this paper aims at assessing the impacts of exchange rate on domestic price in china by means of an empirical analysis. Mainly through the measurement of two indicators of inflation: the Consumer Price Index CPI and the producer price index PPI for the study, constructing a vector autoregressive model, and carried out a cointegration test, error correction model has been set up to carry out empirical analysis. We get the conclusion that the RMB exchange rate on the consumer price index and producer price index for the transmission effect is incomplete, and the consumer price index for the transmission of relatively weak, but with the lag.In Chapter 6 based on the previous analysis ,this paper get some idea such as how to deal with inflation and how to implement appropriate monetary policy, also put forward some proposals on China's exchange rate system adjustment and the direction to the future .