The Incomplete Pass-through Analysis On RMB Exchange Rate To Price

20th century 70s, because of the collapse of Breton Woods System, money is no longer pegged to the dollar, and countries are also no longer requiring the range about exchange rate volatility. After that, Western countries carry out the floating exchange rate system, which is based on the market supply and demand. At the same time, people focus on the international exchange rates, the relationship between the exchange rate and commodity prices; and countries began to widely concern about the impact of exchange rate to the entire international market. Since July 21,2005, the reform of RMB exchange rate, the Western countries began to call for the appreciation of RMB in the view of their economic and political benefit, coupled with domestic economic environment; the exchange rate of RMB appreciates from 8.2791 to 6.8312.The issue of RMB exchange rate is not only an economic problem, but also an international political issue. At present, our country is facing an unprecedented appreciation pressure of the RMB exchange rate, and fluctuations in the RMB exchange rate are bound to affect the import and export commodity prices and market competitiveness. The RMB exchange rate fluctuations will first affect the import and export commodities, and then pass to the domestic general merchandise according to a number of other mechanisms and methods. For the import general commodity prices, the influence extent, influence channel have became the focus. According to the pass-through flexibility analysis on exchange rate to price, this paper has intended to make recommendations for government, to maintain price stability and promote economic development. This paper, which is divided into seven parts, applies a combination method of theory and empiric.Part 1 is Introduction. This part firstly descrambles the background and significance of the topic, and then discusses the focus and structures about this paper, finally, sums up the innovation and shortcomings of this paper. The second part is a literature review, which is divided into three parts. Early researches focused on the purchasing power parity theory and the law of one price; and then, researchers began to find the reasons why the purchasing power parity theory and the law of one price were unsubstantiated; In the period of theoretical analysis on exchange rate pass-through, scholars were also beginning to examine the exchange rate from a positivist point.The third part is channels and mechanisms analysis on the transmission from exchange rate to price. Among them, the channels are divided into two parts, the direct channel is the impact of exchange rate on import prices, and indirect channel is the impact of exchange rate on the domestic of commodity prices in general. Mechanism analysis includes four aspects:the cost of production mechanism, the money wage mechanism, the expected mechanism, and the substitution effect mechanisms.The fourth section analyzes the reasons on incomplete pass -through of exchange rate, and study the actual situation from the perspective of micro and macro about China. Microeconomic reasons include manufacturers pricing strategies, pricing, currency, sunk costs, and internal substitution of goods. Macroeconomic reasons contain the openness of the economy, exchange rate volatility and macroeconomic policies.The fifth part is empirical analysis about the pass-through of RMB exchange rate to import price. Among them, besides the overall import price, there are commodity prices about five main categories, food and live animals, tobacco, oil wax of animal and plant, chemical products, machinery and transportation equipment.The sixth part is empirical analysis about the pass-through of RMB exchange rate to domestic prices, and selects industrial products and consumer products prices on behalf of general domestic prices. This part is also studying the long-term and short-term relationship between variables making use of the vector autoregressive models and vector error correction model.The final part is the conclusions and policy implications. The empirical results show that there exists long-term equilibrium relationship between variables. Policy recommendations:maintaining the RMB exchange rate fluctuate slightly in order to achieve the macroeconomic stability; making use of macroeconomic policies rationally to decrease the negative influence caused by exchange rate fluctuations; straightening the transmission mechanism of exchange rate to price, and adopting targeted policies according to the market; the exchange rate as a bond of the international price, foreign exchange market must be strengthen and improved.