Empirical Analysis Of RMB Exchange Rate Pass-through Effect On CPI

Since the exchange rate regime reform in2005, RMB has come a long way of appreciation. However, persistent trade surplus and extraordinary foreign exchange reserves bring further pressure to the appreciation of RMB. The appreciation of the RMB has become a hot issue, and the relationship between RMB exchange rate and price level get more attention. In order to promote economic growth in China, the goal of monetary policy is to keep the currency stable. Therefore, to decrease inflation is the base to implement monetary policy in our country; the stability of RMB is the foundation of economic growth. Many scholars’ studies have suggested that a country’s exchange rate can affect its price level. Usually, the appreciation of currency can decrease domestic price level. However, the price level was increasing in our country while RMB was appreciating. In order to achieve the goals of monetary policy, we should study the RMB exchange rate pass-through and the route of RMB exchange rate pass-through.Firstly, this paper sorts out studies on exchange rate pass-through at home and abroad. Secondly, this article introduces paths of exchange rate pass-through, and analyzes the pass-through paths of RMB exchange rate. Then, this paper reviews the variation of RMB exchange rate and the change of China’s CPI from1994to2012, then it makes a preliminary judge on the relationship between RMB exchange rate and CPI. Using the data from2001to2012to make ADF test, granger causality test, co-integration test and impulse response, this paper figures out long-term equilibrium relationship between RMB exchange rate and price level in China, and explores RMB exchange rate pass-through under different paths. The main results are as follows:the appreciation of RMB will raise China’s price level, under the money supply path, the RMB exchange rate pass-through effect is stronger. Money supply is the major cause of inflation in China. According to results of the empirical study, this paper argues that the appreciation of the RMB could not curb inflation effectively, while monetary policy is useful to decrease inflation. Government should strengthen domestic demand and reduce hot money.