A Study On Exchange Rate Pass Through Effect And Industrial Products’ Capability Of Pricing To Market

Under the background of economic globalization, exchange rate is an important part of price system, its change will not only affect the foreign trade and economic internal resource allocation of a country, but also affect exporter’s capability of pricing to market by impacting on its organizational behavior directly in many ways. According to the theory of traditional economics, if the elasticity of trade balance conforms to Marshall-Lerner condition, currency appreciation will reduce trade surplus and improve the terms of trade. Based on this, in order to avoid the trade friction caused by trade surplus and ease domestic inflation, our government began to innovate in exchange rate system at Jul.21st2005, Since then, the RMB exchange rate in general has been in the state of continual appreciation. However, The trade friction between China and its major trading partners have not been eased effectively. At the same time; the trade protectionism has risen gradually because of the financial crisis and debt crisis in the euro zone and United States, China has suffered double pressure of RMB appreciation and weak external demand, exporters have been in a hard period. A study on exchange rate pass through effect and industrial products’ capability of pricing to market is crucial for improving the profitability of exporters, increasing the gains from trade and promoting national welfare.Based on the acquired research result about exchange rate pass through effect and capability of pricing to market, this paper dissects the mechanism of action and internal relation between exchange rate pass through effect and capability of pricing to market, then further from the perspective of Melitz’s firm heterogeneity theory(2003) and Antras’ enterprise behavior theory(2003), analyses the exchange rate pass through degree and capability of pricing to market under different enterprise organizational behavior by bringing the enterprise heterogeneity which is caused by production efficiency variance into the research framework. Through statistical analysis on exchange rate movement and China’s foreign trade, we explore the dynamic change of exchange rate under different exchange rate regime and the past and present of China’s foreign trade.In order to study on this issue objectively and comprehensively, this paper combines qualitative and quantitative methods, uses2002-2008monthly data of16major industries in China, then groups them on the basis of productivity and builds panel model to empirical analyze exchange rate pass through degree and capability of pricing to market under different enterprise organizational behavior. Then empirical result shows that, the industry which adopts FDI mainly exports resource-intensive and technology-intensive products and invests in exporter of product directly, there is no significant relationship between the export price and exchange rate, so there is no capability of pricing to market; the industry which adopts headquarters service outsourcing mainly exports capital-intensive products, it has inverse transmission effects when facing the fluctuant of exchange rate, its capability of pricing to market is the strongest; the industry which inputs intermediate products into offshore outsourcing mainly exports traditional labour-intensive products, its exchange rate pass through effect is imperfect when it faces the fluctuant of exchange rate, and it’s capability of pricing to market is partial; the industry which adopts domestic outsourcing or domestic vertical investment mainly exports general labour-intensive products, its exchange rate pass through effect is excessive when it faces the fluctuant of exchange rate, and its capability of pricing to market is the weakest. Based on this result, this paper presents recommendations to further improve exporters’capability of pricing to market.The contents of this paper is divided into five parts; The introduction elaborates on the background of the topic, theoretical significance and practical significance as well as an overview of the research methods, structural arrangements, the innovation idea and difficulty of this paper. The second chapter reviews the literature with respect to exchange rate pass through effect, capability of pricing to market and enterprise organizational behavior. The third chapter defines the key concepts of this paper, dissects the mechanism of action and internal relation between exchange rate pass through effect and capability of pricing to market, analyses the exchange rate pass through degree and capability of pricing to market under different enterprise organizational behavior by building theoretical framework. Chapter four and Chapter five are the empirical part of this paper, analyzes the dynamic movement of exchange rate under different exchange rate regime and China’s foreign trade, groups16major industries in China and builds panel model, empirical analyzes exchange rate pass through degree and capability of pricing to market under different enterprise organizational behavior. The last part is policy recommendations based on the conclusions of this study.