Empirical Analysis On The Effect Of RMB Exchange Rate Pass-through To Domestic Price Level

Since the exchange rate reform in2005, the value of RMB have rised largely.According to the traditional theory of exchange rate mechanism, appreciation of theRMB greatly will lead to China’s export commodity prices rise and decline incommodity prices, and then the effect of the cost of production, money wage andcompetition in similar products makes the decline in the domestic price level.However,China’s price level has not been curbed, but continued to rise.and thelong-term high price level has severely affected on the quality of life of residents inChina. So, researching the effect of fluctuations of the RMB exchange rate on thedomestic price level is helpful for the monetary authorities to make better use of theexchange rate, interest rate and open market operations and other monetary tools tocontrol the current price level.On the basis of previous studies, the paper use empirical methods to research theeffect of the RMB exchange rate fluctuations on the domestic price transfer effectfrom the angle of the change of variables and parameters. The paper has five parts, thefirst part is the introduction, mainly explains the background and significance of thistopic, plan the paper’s structure and methods of research, learn the existing researchresults at home and abroad. The second part mainly explains basics, ways and thefactors of influence for the fluctuations of exchange rate on the domestic price levelfrom the theory of the mechanism of exchange rate. The third part uses the sampledata in2000January to2012June and DCC-GARCH model to study the relationshipbetween the fluctuation of exchange rate and the domestic price level. The studyfound, the exchange rate market and the domestic market has certain degrees of fusion,especially has high contact with the purchase price index.The fourth part uses themethod of measurement error correction model, the impulse function and state spacemodel to research the pass-through effect of RMB exchange rate fluctuations on thedomestic price level from the angles of change variables, parameters. Finallyconclusion is given in the fifth part: first, the appreciation of the RMB promoteincrease in the domestic price level; second, China’s price level is the type of input.Thus put forward three suggestions for the paper’s research.