A Research On The Impact Of RMB Exchange Rate Fluctuation On Domestic Prices

Maintain prices at a stable level and RMB to be a stable currency is the authoritymonetary policy, and they have close relations. The relation of them has become oneof the important topics in Applied Statistics. Since2007, especially in2010, China’sconsumer price index is rising constantly, the domestic price has become the primarytask of the government macroeconomic regulation and control work. At the same time,China is still burdened with the pressure of RMB appreciation. It has very importanttheory significance and practice value to use the exchange rate policy correctly, andanalysis the change of exchange rate effected on domestic price accurately for china’smacroeconomic control.The paper introduces the domestic background of RMB exchange rate and the pricefluctuation firstly; then discussed the traditional theory of “PPP” and “LhasaSamuelson”, new theory of the relation of price and exchange rate, the channel ofRBM exchange rate effected on domestic price; thirdly, analysised on the history ofRMB exchange rate changes system, the present situation of RMB exchange rate anddomestic prices, the contrasted trend between the RMB exchange rate and prices;fourthly, the paper selected monthly data since July2005when begun to exchange therate to March2011, researched the relationship between the RMB exchange rate andthe domestic price, then selected the Import Price Index (IPI), the Producer PriceIndex (PPI) and Consumer Price Index (CPI) as a measure of domestic prices. At thesame time, the paper also selected other five factors: the price of oil, consumerexpectation index, consumer satisfaction index, money supply and interbank rate, thenestablished VAR model, Impulse response, Cointegration test, Error correction modeland Variance decomposition to study of the RMB exchange rate effects on domesticprices. Finally, the paper gave some corresponding policy recommendations based onempirical analysis in four respects: the price control, the RMB exchange rate’sadjustment, monetary policy and the management of people’s expectation.The empirical results show that:(1) In the long term, there are a long-termcointegration relationship between RMB exchange rate and domestic price, and playan inhibitory effect on prices. The inhibition degree of RMB exchange rate effect onthe import price index and producer price index was greater than on the consumerprice index.(2) In the short term, the RMB exchange rate impact on the IPI and thePPI is bigger than CPI, RMB appreciation have negative impact on the IPI and the PPI. The impact reaches the highest in six months or so and then drop stable. RMBappreciation has positive impact on the CPI, and the range of impact is small.(3)RMB appreciation impacted on consumer products in the food, living and life ingeneral commodity is higher, and higher than the appreciation on CPI and PPI.(4)The people’s expectation, interbank rate and the RMB exchange rate is the mostimportant facts impact on domestic prices. The empirical conclusion can providesome references for our government to formulate relevant monetary and exchangerate policy, price stability and so on.