Research On The Relationship Between Exchange Rate Fluctuation And Core Inflation In China

First this paper analyzes our country’s CPI and its sub-index from January2001to July2011.Then it distinguishs the short-term fluctuations from CPI by the H-P filter method andconsiders the decomposition of long-term trend as the core inflation of China. At last, on thebase of inflation pathways of the exchange rate, I select these variables,such as nominaleffective exchange rate and foreign exchange reserves to measure the exchange ratefluctuations on the core inflation in the short-and long-term impact and direction using thevector error correction (VEC) model. And the paper analyzes its impulsive effect to moreaccurately measure the relationship between them.Currently facing the debt crisis of Europe, severe inflation and the multiple appreciationpressures of, this paper puts forward several suggestions on how to stabilize the value ofRMB, focusing on the four aspects of the prevention and reduction of inflation expectations,step by step the process of marketization of the RMB exchange rate, the acceleration theprocess of marketization of interest rates and the strengthening of the risk management offoreign exchange reserves.