A Study On The Mechanism And Effects Of Pass-Through From RMB Exchange Rate To Prices

As the core economy variables in open economy,exchange rate and prices are closely related.Moreover,the discussion of the relationship of these two variables always accompanies the development of the exchange rate theory.In the very beginning,researchers found the incomplete pass-through of exchange rate to prices based on the test of Purchasing Power Parity(PPP) and the Law of One Price.Then, the focus of the exchange rate pass-through mechanism was changed to the market segmentation and prices variance of industrial organizations and different products. The pass-through of exchange rate to prices did not decline until the 1990s,when many countries' currencies deeply devaluated.After then,researchers started to study the stability and the reasons of the transmission effects of the exchange rate to prices. Since the reform of the RMB exchange rate formation mechanism in July 2005,the fluctuation of the exchange rate has been an important part of the economy.With the widening of the range of the exchange rate fluctuation,it is the focus of the academic field that whether the exchange rate fluctuation affects the stability of the domestic prices.Meanwhile,it is the key point in the formulation and implementation of the currency policies that how does the central bank handle with the exchange rate fluctuation and the prices fluctuation by implementing the currency policies.This thesis does empirical study on the pass-through effects of the exchange rate fluctuation to the Import Price Index(IPI),the Ex-factory Price Index(EPI) and the Consumer Price Index(CPI) based on the data from January 2001 to January 2009. The thesis adopts JJ Co-integration Test to estimate the long term relationship of exchange rate and price,and adopts Error Correct Model to analyze the adjustment effects of the short term divergence to the long term equilibrium.The thesis also analyses the dynamic short term inducement of exchange rate pass-through by the Impulse Response Function and Diagnose Method.The empirical study shows that there is an incomplete pass-through of the exchange rate fluctuation to domestic prices.More specifically,IPI is sensitive to the exchange rate fluctuation while EPI and CPI are relatively slow,especially the CPI.The pass-through effects of the exchange rate fluctuation to CPI are really limited whether in long or short term.Becides that,money supply M1 palys a more importance role in CPI than inIPI, EPI,but all of them are limited.Based on the empirical conclusion and the realities of our country,the thesis presents the necessities of consummating the exchange rate formation mechanism and enhancing the independency of the currency policy.