The Research Of The RMB Exchange Rate Pass Through To Prices In China

Over the years,exchange rate pass-through effect on prices has been the hot spotsof the countries studied by economists.With the development of economicglobalization,the extent of China’s opening to the outside world continues hascontinuously deepened.The impact of exchange rate changes on China’s import andexport trade, the optimal monetary policy and resource configuration is also growing,and the price of exchange rate pass-through effect is the intermediate links betweenthe exchange rate changes and these effects, so it is very necessary to study the RMBexchange rate pass-through effect on our prices.The study of exchange rate pass-through has experienced two stages: theexchange rate completely pass and the exchange rate incompletely pass. The scholarsgenerally believe that the exchange rate pass-through mechanism should be dividedinto two aspects: direct transfer mechanism and indirect transfer mechanism, and theexchange rate pass-through to he price incomplete will have an important impact onthe economy of a country. From the research of China’s economists on the RMBexchange rate pass-through to the prices in recent years，the article think that theRMB exchange rate pass-through mechanism is divided into direct and indirecttransmission mechanism too. The direct Transmission mechanism affects our countryprices through effecting the prices of imported intermediate goods and importedconsumer goods, while the indirect Transmission mechanism mainly includes incomemechanism, expectation mechanism, alternative mechanisms and debt mechanism. Inaddition, from the situation of changes of the RMB exchange rate and the domesticprice in recent years, we can find that the RMB exchange rate pass-through to theChina’s price is not entirely, while the transmission level and transfer direction are notstable. At the same time, the RMB exchange rate pass-through will also have animpact on the economy of our country, mainly in the following three aspects: First, ithas an impact on China’s price level; second, it has an influence on our country’smonetary policy independence; third, it impacts the China’s import and export tradeand external defense capability.Through the establishment of VAR model by using the monthly data of CPI, PPI,OIL, M1, GDP and EER form August2005to October2012and using a variety ofempirical methods to analyze the long-term effect and short-term effect of RMBexchange rate pass-through, this paper found that the RMB exchange rate change is incomplete pass-through to prices, and the pass-through is small and there are certaindelay. At the same time, the degree of RMB exchange rate pass-through to producerprices index is deeper than to the consumer price index. In addition, grouping data byusing the Chow breakpoint test, while using the impulse response function andvariance decomposition test method, the paper found that in different period of RMBexchange rate volatility under different circumstances of RMB exchange ratepass-through effect existence difference, the concrete manifestation is: when thedegree of exchange rate fluctuation is bigger, the RMB exchange rate pass-througheffect will be larger.After researching on the RMB exchange rate pass-through effect from theperspective of theory and empirical angle, this paper argues that China’s monetaryauthorities should adjust the exchange rate policy gradually and carry out a prudentmonetary policy, at the same time, they should consider the blocking effect ofexchange rate pass-through in the formulation of monetary policy.