The Appreciation Of The Renminbi Curb Inflation The Validity Of The Research

Since the restart of the exchange rate system reform in2005, China has seen two periods of inflation. Some scholars view these domestic inflations as the result of the international commodity prices increase and propose the central bank to use the RMB appreciation as a tool to control inflation.However, the RMEB’s exchange rate has increased31.25%since2005, but the domestic goods price did not decrease as the RMB exchange rate increased. This article is writing to verify the effectiveness of RMB appreciation to control domestic inflation. Also, exchange rate inflation could have serious impact on other aspects of Chinese economy. This article also uses a cost-benefit analysis to test the overall impact of RMB appreciation.This article contains six chapters. Chapter one is the introduction, this part introduce the article background and the basic framework. Chapter two reviews the related literatures. Chapter three is the theoretical analysis of the relationship between exchange rate and domestic price, and classifies the impact of exchange rate to domestic prices into three channels. Chapter four uses a SVAR model to verify the impact of RMB’s appreciation to domestic inflation through different channels. In Chapter five, a cost-benefit analysis is used to verify the overall direct impact of RMB appreciation to Chinese’s economy. The last Chapter provides some suggestions on exchange rate and monetary policies based on the empirical analysis before and make the conclusion.There are three main conclusions in this article. Firstly, the recent inflation in China is caused more by domestic factors other than imported ones. Secondly, the RMB appreciation could be used as a tool to control inflation in the short-run. However, in the long run, the central bank should pay more attention on the asset prices and the money supply to control inflation. Lastly, the const-benefit analysis of the RMB appreciation verifies that the direct cost is higher than the direct benefit in the short-run. To control the negative impact of RMB appreciation, the central bank should coordinate the exchange rate policy with the industrial policy, fiscal policy, and other monetary policy.