Empirical Study On The Impact Of RMB Exchange Rate Change On Domestic Prices

As an important macroeconomic environment variable, Exchange rate has a profound impact on the national economy. This paper aims to analyze the exchange rate pass-through to price levels in China. The traditional international economic theory suggests that exchange rate fluctuations will be reflected in proportional change in the price level, above which the exchange rate transmission is complete. Increasingly, however, facts have proven that the price of a country's pass-through is often incomplete. In 2005, after the exchange rate reform, the RMB exchange rate fluctuates more frequently and deeply. It is worthy of our in-depth analysis that how and how much the RMB exchange rate fluctuations influence domestic price, therefore the macroeconomic environment. Due to the connections between the exchange rate pass-through and a country's monetary policy, inspection and analysis of the RMB exchange rate pass-through acts for China is of great significance to develop sound monetary policy.This paper has reviewed the literature at home and abroad, and established a semi-open economy model based on the actual situation against China. The variables include RMB nominal effective exchange rate, domestic price level, foreign price level, gross domestic product. Through the unit root and co-integration test to determine the existence of long-term stable relationship between domestic price level and the RMB exchange rate. Through the establishment of the regression equation to analyze the level of RMB exchange rate pass-through to price. At the same time, with the establishment of vector autoregressive models, this paper uses impulse response functions and variance decomposition method to analyze the response of domestic price level to each variable and the degree of the variables contribution to the variance. The empirical study suggests a long-term stability of the negative correlation between China's price level and RMB nominal effective exchange rate, that is, the appreciation of the RMB exchange rate have a deflation effect, while the exchange rate pass-through is incompletely and has a lag. In times of financial crisis, inflation is low and stable, so the price of the exchange rate pass-through effect will be reduced. Based on empirical results, this paper gives some insights and policy recommendations on monetary policy, doubt ness of the superiority of floating exchange rates, appropriate exchange rate fluctuations, the effeteness of RMB exchange rate appreciation as a means of controlling inflation and co-ordination between interest-rate policy and exchange rate policy.