A Study On The Price Transfer Effect Of RMB Nominal Effective Exchange Rate

This paper firstly researches on the relationship between the exchange rate and the price, to sort out the theoretical basis of the exchange rate pass-through mechanism and transmission path. Then, on the basis of the path of the exchange rate pass-through, this article uses product, currency supply, exchange rate, import prices, producer prices and consumer prices to establish a vector autoregression(VAR) model to analyze the transfer of the nominal effective exchange rate on the domestic price level. The main feature of this paper is to study the RMB exchange rate pass-through effect on the entire chain of domestic prices (import prices to producer prices to consumer prices), and comparative analysis of the nominal effective exchange rate pass-through effect before and after the exchange rate reform on China in July2005.This paper reaches the following conclusions:First, Nominal effective exchange rate appreciation leads to the decline of the domestic price level. Second, by impulse response function analysis, the nominal effective exchange rate pass-through effect of import prices, producer prices, and consumer prices exists. But, the overall transfer coefficient is not high and presents certain delay. Third, by variance decomposition, it can be found that CPI fluctuation is caused by the money supply, the producer price index, and the exchange rate movements. Four, sub-sample comparison analysis finds a significant increase in the pass-through effect of the exchange rate on the price by increasing flexibility of exchange rate, which means that the nominal effective exchange rate appreciation will help ease domestic inflation.Accordingly we propose the following policy recommendations:First, implementing a more market-oriented exchange rate regime to increase exchange rate flexibility, in order to strengthen the exchange rate pass-through effect on prices, to ease inflationary pressures. Second, because the explanation of the exchange rate on inflation is limited, it does not need to focus on the appreciation of the RMB exchange rate inflationary pressures. A more independent monetary policy can be implemented to control the money supply to ease inflationary pressures.