Study On Renminbi Exchange Rate Pass-through And Its Influencing Factors

As the external and internal monetary value respectively,exchange rate and thedomestic price level are the two important price indexes of a country.According to thegeneral theory of international economics, the relation between exchange rate and thedomestic price level is positive, the internal value of a currency rises when its externalvalue rises. However, since the exchange rate reform in July2005, along with theappreciation of the RMB exchange rate, the domestic price level did not declinesignificantly, but there was high inflation in2011. This paper explains thisphenomenon from the perspective of RMB exchange rate pass-through effect and itsimpact factors.Methods of normative analysis and empirical analysis are used in this paper.Thepaper introduces the theoretical basis of exchange rate pass-through and its influencefactors from the perspective of normative analysis,and uses the quarterly data sincethe reform to estimate of the RMB exchange rate effects, trends and factors byestablishing VAR model.This paper also adopts qualitative and quantitative method toanalyze the situation of the RMB exchange rate and CPI movements since theexchange reform.At the base of the methods above, this paper firstly introduces the theoreticalbasis of exchange rate pass-through,including the Purchasing Power Parity law,thetransmission path and the Price to Market theory in the first chapter.In the secondchapter,the paper analyses the RMB exchange rate and the CPI since the reform.TheRMB exchange rate has an increasing appreciation and lager and two-side fluctuationafter the reform.There was two inflation with the significant input characteristic. Theeffect of RMB exchange rate pass-through is limited.In the next chapter, a VAR model based on the quarterly data from September2005to December2013was established to study the relationship between the CPI andRMB exchange rate changes. The results show that the RMB exchange rate changes isthe Granger cause of CPI.There is a long-term equilibrium relationship between theCPI and the nominal effective exchange rate. Error correction model results show thatwhen the CPI deviates from the long-run equilibrium level, it has a self-correctingmechanism for automatic convergence. Then the state-space model of the RMB exchange rate pass-through shows that there is a upward trend of the RMB exchangerate pass-through effect during the sample period. To explain the aboveconclusions,chapter IV analyzes the factors of the RMB exchange rate pass-throughfrom the perspective of regulative and empirical analysis.Innovation of this paper is tobring the invest openness into the model, testing the impact of capital accountliberalization on the RMB exchange rate pass-through. The empirical results showthat the exchange rate volatility, macroeconomic stability and external openness areimportant factors that affect the RMB exchange rate pass-through.Through the above analysis, the paper draws the following conclusions: RMBappreciation not only can not curb domestic inflation, but will bring up the CPI, thenominal effective exchange rate changes each1%will drive CPI to change0.2249%,the RMB exchange rate pass-through effect showed increasing trends, the indexwhich reflects the degree of capital openness-the investment openness,has the largestimpact on the RMB exchange rate pass-through.Based on the above findings, the paper concludes with specific policy proposals.