Research On The Effects Of The Rmb Exchange Rate Volatility On China's Price Index

In recent years, China’s macroeconomic facing the so-called "double high" phenomenon, on the one hand the exchange rate of RMB against USD has been steadily rising since the exchange rate system reforming in2005, on the other hand, the domestic economy undergoes a period of inflation, especially the CPI index touched a high value.in2008and2010.This "double high" phenomenon means that RMB is experiencing a foreign appreciation as well as a internal devaluation.Some scholars believe that the appreciation of the RMB can be used as a tool for controlling inflation.The theoretical basis is when RMB appreciates against foreign currency, the price of imported goods will decline, this decline in the price will delivery to the domestic ex-factory price of goods and consumer prices, and even the overall domestic price index, resulting in the power of inflation. The theoretical transmission mechanism is established or not? If established, how is the effect?Research on the subject contributes to a deeper understanding of the relationship between these two basic economic concept. Meanwhile, taking into account for an open economy, exchange rate is an important economic indicator, and the price level is directly related to the the quality of public life, so study on the relation between exchange rate changes and domestic price levels from a realistic point of view is also very significance.In this paper, theories such as purchasing power parity are applied to analyze the mechanism of currency appreciation on the domestic price index,also the the causes of inflation and exchange rate fluctuations channels on this basis for the actual situation in China.Considering the phenomenon that inflation have not been eliminated by the appreciation of the RMB, this paper focuses on the causes which make inhibition between exchange rate changes and inflation not take into effect. Furthormore the fact that appreciation may promote the inflation is elaborated.Then the author analyzes China’s monthly economic data in2005-2011by quantitative analysis software EVIEWS6.0, and concluds that the impact of the RMB exchange rate of the CPI index is not significant,and according to Granger causality analysis the RMB exchange rate is not Granger cause of China’s CPI. After that,, the author obtains a conclusion that taking the appreciation as a means of controlling inflation was not ideal which also fits the conclusions of the theoretical analysis part. At the end of this article,,a series of policy proposals for exchange rate reform and inflation control are put forward on the theoretical and empirical results.