Study On The Price Pass-through Effect Of RMB Exchange Rate

In an open economy, price and exchange rate, the two core economic variables,have a significant effect on economic activities, which are closely related with eachother. On July21st,2005, the People’s Bank of China issued a notice to improve theRMB exchange rate formation mechanism reform, announced that China began toreform the exchange rate regime by moving into a managed floating exchange rateregime based on market supply and demand with reference to a basket of currencies.Through the exchange rate reform, the RMB exchange rate formation mechanismbecame more perfect and the fluctuations improved greater flexibility. But meanwhile,China’s price index rise continuously, then, exchange rate and price became the focus ofscholars’ attention. This paper investigates the effect of RMB exchange ratepass-through on import price, producer price and consumer price. First, the papersummarizes the main pass-through theories, combs the chain of exchange rate changestransfer on prices, and then describes the history of the RMB exchange rate systemevolution and the three types of price index and its changes. Then, we conduct anempirical study by establishing a SVAR（Structure Vector Auto Regression）model,using monthly data from July2005to December2008, investigating the exchange ratepass-through to import price and domestic price.The result shows that:1)The pass-through of RMB nominal exchange rate into thethree price is incomplete and exists some delaying, in the long term, while the changesin exchange rate rise1%,the changes in import price, producer price and consumer pricewill decline0.55%,0.07%and0.08%;2)The exchange rate shocks on the changes ofimport price, producer price and consumer price’s explanatory power along thedistribution chain of goods shows a decreasing trend, and in the long term, the extend ofexplaining maintain the level of18.7%,11%and10%;3)The global financial crisis havelittle impact on the overall trend of exchange rate pass-through, but the size of pricetransmission rate has been great influenced, especially the size of exchange ratepass-through to import price.