A Study On The Pass-through Effects Of Exchange Rate Change On The Inflation In China

Since the reform of RMB Rate of Exchange System in2005, a floating exchange rate system, which is regulated referring to a basket of currencies, rather than pegged to the single one, and subjected to the management of relevant authorities, begins to be carried out in China. The international status of our nation continues to rise with the increasing number of foreign trade partners and expanding trade scale. Under the environment of current open economy policy, as a core instrumental variable, exchange rate has become an vital factor affecting the macro economy in a whole to imbalance of the development of world economy, the trade surplus and huge stash of foreign-exchange reserves resulted from that, a new round of boom of buds in the field of study the RMB exchange rate. As a large developing country, the factors that affect the exchange rate pass-through effect have their specialty. Hence, to evaluate the validity of the exchange rate pass-through theory in China can provide some beneficial references to help relieve domestic inflation and it is also advantageous for enaction of a sensible currency policy to study the influence that the flexibility of exchange rate can have on civil prices.In Chapter one, the background and significance of the research, the current researches at home and abroad are feathered, as well as the research methods and purposes. In Chapter two, a retrospection about the theory of Exchange Rate Pass-through, Incomplete Exchange Rate Pass-through and currency inflation is given. In Chapter Three, the author makes general analysis on the flexibility of RMB exchange rate and the current situation of currency inflation in China and reviews the historical evolution of RMB exchange rate featuring the changes of Chinese RMB exchange rate and history and currency of inflation in China. Theoretical analysis is made on the influence that changes of exchange rate have on inflation, including channel and macro impact of exchange pass-through as well as exchange pass-through under different exchange system in Chapter Four. In Chapter Five, an empirical analysis is made on exchange rate pass-through before and after the exchange rate reform through VAR model. In Chapter Six, conclusion is drawn based on the analysis in previous chapters and related policy suggestions are given after that.Several conclusions of the research are as follows:The pass-through from flexibility of exchange rate to PPI and CPI is incomplete; exchange rate has greater impact on PPI than CPI; the more flexible exchange rate system is, the greater influence changes of exchange rate has on PPI and CPI; exchange rate has less influence on inflation in China, comparing to other factors like petroleum; exchange rate passes through inflation through more various and complicated channels, there may be a deviation from traditional economy theory in a short term; impact of M2on inflation in our nation is increasing, therefore, the channel that currency policy passes through inflation in our nation is getting clearer.