Empirical Study On The Impact Of RMB Exchange Rate Change On Domestic Inflation

Exchange rate and the price are two key variables in the macroeconomic environment. The former represents the eternal value of the currency and the latter represents the internal value. There is a linkage between the two and they are unified in the stability of the value of the currency. Because of the integration of the global economy in the world, the economy of all countries is facing openness.The economic and trade relations between countries is increasingly frequent. According to the "law of one price" and "purchasing power parity theory", international prices can influence the domestic price through the exchange rate.The exchange rate regime in our country has been converted from being pegged to the dollar to a managed floating exchange rate regime, being based on the market supply and demand, with reference to a basket of currencies in2005. In recent years, the appreciation of the exchange rate of RMB has been sustainable and of high frequency. It does not seem to have significant influence on to the prices of exported commodities, and the balance of payments is still keeping a big international trade surplus. The exchange rate of the RMB is on appreciation. The international trade surplus is also through an expansion.The domestic price level continues to rise. All these seem to be a departure from the phenomenon that the fluctuation of the exchange rate is negatively related to the changes of the price traditionally.So, since2005, a large number of domestic and foreign scholars have studied the pass-through effect of the RMB exchange rate to the price level in our country in order to assess the degree of the pass-through effect. After that we can put forward a constructive suggestion for our country to seek the right policy to reach the internal and external equilibrium of economy.After the financial crisis, with the requirement of the exchange rate appreciation from the domestic and the international besides the high inflation rate in the domestic economy, it is worthy for the paper to study the pass-through effect of the exchange rate fluctuation to the domestic inflation. This paper will take empirical analysis combined with theory analysis to analyze the pass-through effect in the post-crisis era.This paper has reviewed the literature at home and abroad, and established a semi-open economy model based on the actual situation against China. Then we use the ARDL model which includes variables like RMB nominal effective exchange rate, domestic price level, foreign price level, gross domestic product. Through the unit root and co-integration test, we find out the existence of long-term stable relationship between domestic price level, the RMB exchange rate and foreign price level. Through the establishment of the regression equation, we can analyze the degree of the pass-through effect of RMB exchange rate to price level.According to empirical analysis, we draw the following conclusion:First, The regression coefficient of the nominal RMB exchange rate is small. It shows that the pass-through effect Of exchange rate fluctuation to the price level is low. Compared to the current period, the regression coefficients of the earlier stages is relatively significant. We can see that the pass-through effect Of exchange rate is lag. The coefficients are positive, that means exchange rate fluctuations relates to the price level in the same direction. The second, the coefficient for the foreign price level is significant statistically under the1%level. This shows that the movement of domestic price level is largely from the foreign price level. The third, the regression coefficient of GDP is also small and not significant. This shows that the interpretability of the GDP to price level is weak and so it isn’t a major factor to the price changes. The forth, considering the domestic food prices impulse on the domestic price level, after the introduction of food price variable, the regression coefficients is significant but is relatively small to the foreign price level. That means the food price shock has a weak impact to the price changes.Based on the conclusions analysis, this paper gives out some insights and policy suggestions, the effeteness of RMB exchange rate appreciation as a means of controlling inflation, the appropriate fluctuations for the RMB exchange rate, the independence of monetary policy, to strengthen the ability of our economy against the foreign price level and to reduce volatility of the food price.