The Study Of RMB's Exchange Rate Pass-through Effect

As one of the important macroeconomic variable, foreign exchange rate is not only index of the economy, but also a macroscopic policy tool. Meanwhile many academic researches force on the influence of foreign exchange rate on the economy and the price level. And these researches and discussions about this topic just prompt the development of the theory and the macroscopic policy. As the growth of the economy and globalization of China, the appeal for the appreciation of RMB grows stronger. So the study of pass-through effect will benefit the decision of foreign exchange policy and foreign exchange rate regime and prompt the steady growth of China's economy.Among the dissertations of foreign exchange rate pass-through effect, they all base on the model of New Open Economy Macroeconomic (NOEM) which created by Obstfeld and Rogoff. With differences from previous macroeconomic model, NOEM try to create a macroeconomic model with a microeconomic basement, moreover the NOEM model uses the assumption of sticky price, sticky wage and non-market clearing to replace the assumption of rigid price, rigid wage of Keynes Model and the assumption of market clearing of neoclassical model. So the NOEM model not only provide an effective tool for analyzing the pass-through effect, but also provide new methods to researches on the issues of the monetary policy, economic shocks, incorporation of international economic policy.In the theory analysis of my dissertation, I force on the LCP (Local Currency Pricing)/PCP (Producer Currency Pricing) theory and PTM (Price to Market) theory which all base on the NOEM model. And these two theories analyze the low pass-through effect from different views. PCP/LCP theory manipulates the pricing assumption of NOEM and concludes that the pass-though is effective under the PCP condition; however the pass-through effect is low under the LCP condition. While PTM theory just emphasis on the micro factors that influence the pass-through effect. In the PTM theory, there are two reasons that bring about the low pass-through effect. One is the different price markup in different place which caused by market segmentation. The other is logistic cost in the import country. So in the PTM model, it introduces the two factors above in order to explain the low pass-through effect.The purpose of analysis of the foreign exchange rate pass-through effect in my dissertation is to build connection between the pass-through theory and the foreign exchange regime theory in order to find the proper foreign exchange regime under the current condition in China. So I make the comparison of the fixed exchange rate regime and the floating exchange regime from four different views which are the stabilization, adjustment efficiency, insulation of inflation and policy mix of microscopic. Furthermore my dissertation analyzes the connection between pass-through theory and foreign exchange rate regime theory from two aspects. One is the expenditure-switch effect; the other is insulation of imported inflation. Through the theory analysis, we find that floating exchange rate regime has more benefits when expenditure-switch effect is strong or the insulation of imported inflation is effective. And fixed exchange rate regime is more proper in the opposite situation.It is nature that theory analysis always needs the support of the empirical analysis in order to have the concise view of the economy. So I use cointegration test, error correction model (ECM) and impulse analysis method to analyze the influence of foreign exchange rate on CPI and PPI. From the result, I find that foreign exchange rate pass-through effect is low in China, so it is appropriate to adopt fixed exchange rate regime or pegging exchange rate regime under the current condition.