Incompleteness Of Exchange Rate Pass-through In China

In the traditional theory, the exchange rate pass-through into import and export prices is complete, so the changes in exchange rate can adjust a country's balance of trade through influencing the relative prices of tradable goods. However, China's trade surplus hasn't reduced but maintained since RMB's appreciation in July 2005 which is similar with the Janpanese Yen's appreciation after 'Plaza Agreement' signed in 1985. In order to reverse the huge trade deficit with Japan, the United States allyed with Britain, France, West Germany forcing Japanese Yen to appreciate. Nevertheless, the Japanese import and export prices didn't appear huge fluctuation as expected and the exchange rate performed incomplete pass-through. Japan continued to maintain the trade surplus. Because of this, some foreign scholars began to do emprical studies on the Japan's exchange rate pass-through which showed that incompleteness of pass-through existed in Japan. Based on these studies, this dissertation research the pass-through of nominal effective exchange rate into China's export prices and domestic consumer prices. The empirical results show that, the pass-through in China is incomplete and small. And there are significant differences in pass-through between different inflation environments while the comsumer prices is more sensitive to exchange rate fluctuation in high inflation period. On the basis of the empirical results, the final chapter provides some enlightement and policy recommendations. In a short-term perspective, the appreciation of RMB does't bring too much negative impact on China's overall exports implying that appreciation will not change the status of China's trade surplus in the short term. But it will hurt the export enterprises' profit and the suplus is built on the damage of people's welfare. Therefore, we must change existing export structure transforming from the labor-intensive-based structure to knowledge-intensive-based one and upgrate the structure of export products, reducing the disadvantageous influences on export industry due to the volatility of exchange rate. Besides the monetary authorities should implement a stable and credible monetary policy to stabilize inflation expectations, thus reducing the extent to which exchange rate volatility transfers to domestic inflation and lessening its impact on China's econmy.