Exchange Rate Pass-through Of RMB To Domestic Prices

As a key variable in the open economy, exchange rate plays a very significant rolein maintaining both internal and external balance for one country. Many studies haveshown that fluctuations of exchange rate are not reflected as the same proportion as tothe import and export commodity prices, which led to "incomplete exchange ratepass-through."Since the exchange rate reform of China in July2005, the RMB quitted itspure peg to the US dollar and began its appreciation. By now, the cumulativeappreciation rate has risen over11%, still with an ever-increasing volatility. Based onthis background, it’s important to study exchange rate pass-through onto prices, whichwill help us make a reasonable judge for different industry competitions, meanwhile laya solid foundation for further industrial structure adjustment and exchange rate reform.In this paper, the author take China’s crude oil imports for example, through theestablishment of VAR empirical model, by using series of methods to estimate the effecton the RMB ERPT of domestic crude oil import prices. The result show that neither inshort nor long period passes, the RMB exchange rate on import prices of crude oil areincomplete, the corresponding transmission coefficient is small, and there exits timelags.The paper is structured as follows: Part one introduces the background, thesignificance and the relative arrangement of the study; Part two summarizes the existingdomestic and international literature to EPRT; Part three starts the basic theory of EPRT,including the concept and delivery mechanisms; Part four gives factor analysis forinfluencing RMB exchange rate pass-through; Part five is the core part, containingempirical data selection and processing, VAR model building and related inspection andan analysis on the empirical results; Part six finally draws the conclusions and policyimplications.