A Comparative Country Study On The RMB Exchange Rate Pass-through To China’ Price

Since reform and opening-up, China has conducted a series of exchange rate regime reform. The exchange rate formation mechanism is based on the market. With the continuous development of China’s foreign trade, a huge trade surplus and huge foreign exchange reserves has boosted substantial appreciation of the RMB. While the domestic price level is rising, the domestic price level and exchange rates are complementary. And exchange rate changes are related with the domestic prices level. In this paper, based on the previous studies, we analyze the relationship between RMB exchange rate and domestic price level to provide references for further study.This paper is divided into six parts with the main themes of each part as follows.The first part is introduction including the background, values, related concepts, innovations and difficulties. The second part focuses on the literature review. The literature review contains abroad and home literatures focusing on exchange rate pass-through, and then summarizes the merits and shorts. The third part is about the exchange rate pass-through theory including the concepts, the main empirical models, the transmission mechanism on exchange rate to price, the factors of incomplete pass-through. The forth part is the analysis of the RMB exchange rate and price index changes. First we analyze the RMB exchange rate changes from the point of RMB nominal exchange rate and from the point of RMB nominal and real effective exchange rate. Then we analyze the price index changes from the point of consumer price index and from the point of industrial price index. The fifth part is the empirical analysis between RMB exchange rate and CPI. First we analyze the import from USA and Japan. Then based on two countries’data, we use the EG-ADF method to analyze the relationship between exchange rate and CPI respectively. Empirical analysis shows that there was a significant negative correlation between Sino-USA bilateral nominal exchange rate and China’s domestic price level, while there was a significant positive correlation between the Sino-Japanese bilateral nominal exchange rate and China’s domestic price level. That is, from the bilateral nominal exchange rate point of view, the RMB appreciation not only fails to suppress the domestic price level, but also boosts the price level. The last part confirms the conclusion of this thesis and provides suggestions to the question founded before.