Research On The Exchange Rate Pass-through To Domestic Prices And Policy Enlightenment

With the trend of economic globalization, China has gradually become an open economy. Exchange rate pass-through to domestic prices has been more and more concerned by scholars and regulatory authorities. Whether the appreciation of RMB can significantly affect domestic prices, is very important to the research on the impact of exchange rate to micro economy, the intermediate target of monetary policy, and the inflation control policy.This paper summarizes the classical exchange rate pass-through theories, including the purchasing power parity, Balassa-Samuelson hypothesis and the new exchange rate pass-through theory. Then it analyzes the pass-through channels of the exchange rate fluctuations to domestic prices, from the direct effect, the appreciation of currency will reduce domestic prices through import prices; from the indirect effects, the appreciation of currency will reduce domestic prices through GDP, and will rise domestic prices through asset prices and money supply.This paper makes an empirical study of the NEER fluctuations of RMB pass-through to China's domestic consumer prices and production prices by using cointegration test, pulse response function and variance decomposition methods. The results indicate that the NEER fluctuations of RMB are negatively correlated to consumer prices and production prices, however, RMB exchange rate pass-through effects are so limited that they are not the Granger causes of domestic prices fluctuations. The evidence also shows that fluctuations in consumer prices are mainly due to GDP, and fluctuations in production prices are mainly due to foreign prices shocks.As a result, this paper holds the opinion that the appreciation of RMB can not control inflation, too rapid appreciation of RMB may even cause a bigger pressure to domestic inflation. So we should control a reasonable appreciation rate of RMB rate, try to ease RMB appreciation pressure, strengthen the control of inflation, and promote the exchange rate reform.