A Empirical Analysis Of Relationship Between RMB Exchange Rate, Import Prices And Domestic Prices

The exchange rate is the core of the international trade operation and the changes of thesubject play a guiding role to determine the direction of trade and trade-scale. The import price isthe key to link exchange rates with domestic prices. Besides, the exchange rate fluctuations have animpact on domestic prices via import prices. Furthermore, the domestic price fluctuations not onlyhave an impact on export but also the demand for imported products. Generally speaking, theexchange rate pass-through is the starting point to analysis the relationship between the exchangerate, import prices and the domestic prices. The paper also tries to study the effects of the exchangerate fluctuations on import prices and the domestic prices. The complete exchange ratepass-through and incomplete exchange rate pass-through are distinguished according to whetherone unit of exchange rate fluctuation brings to the same degree of the price fluctuation. In a closedeconomy, the effects of the exchange rate to economy can be ignored. That is to say, there is noconduction effect of exchange rate on prices. Contrarily, the exchange rate fluctuation can cause thesame degree of the domestic price change in an open economy. In other words, the exchange ratepass-through is complete. Currently, the openness of Chinese economy is continuouslystrengthening. With the improving market force and the widening fluctuation of RMB exchangerate, exchange rate exerts an increasing conduction impact on prices. Given this, it is of greatsignificance to analyze the effect of RMB exchange rate fluctuations on China’s price which is ofgreat importance to control inflation and develop an appropriate monetary policy.The first chapter mainly raises the question, summarizes the related literatures of theexchange rate pass-through from the domestic and foreign dimensions and elaborates thesignificance of the research. in the second part, based on the conception and type of exchange rateconduction, it explores the detailed mechanism of price conducting effect on the fluctuation ofRMB exchange rate The third part analyzes the relationship between RMB exchange rate, importprice and domestic price level on the basis of describing the changes of them. Chapter four is theempirical analysis. Based on monthly data from July2005to December2011, the paper employedthe money supply, trade openness, RMB exchange rate and the domestic price level to study the RMB conduction effect on the import prices of Chinese economy and domestic prices. At last, thepaper gives the conclusions and proposes policy implications. The main conclusions are as follows.1. The fluctuations of RMB exchange rate has a direct impact on import price level and theimpact is of great significance.2. RMB appreciations indeed can relief the inflation to some extent. However, the effect is notobvious.3. There exists the price transmission chain of exchange rate pass-through.That means fromexchange rate fluctuations to import price, then to Ex-factory Price Indices of Industrial Productsand to consumer price at last.