The Effects Of Exchange Rate Changes On The Goods Prices In China And Korea

After Asian economic crisis, South Korea implemented the floating exchange rate system and inflation targeting system. The first time South Korea enforced the floating exchange rate, Korean won depreciated sharply against the dollar and it caused the Korean domestic consumer prices to go higher. To lower the high exchange rate pass-through to consumer prices, Korean government effort to improve the macroeconomic policies, including implementation of the inflation targeting system. As a result, when the 2008 financial crisis hit, despite the won-dollar exchange rate soared again (KRW depreciated), the exchange rate pass-through to consumer prices has decreased.Recently, the Chinese government took a serious view of exchange rate reforms. But China is still a developing country. It has a low ability of resist against the external shocks. If China adopts the floating exchange rate system in the future, the impact of exchange rate on the domestic consumer prices will be the major concern of China. However, since 1998, Korea has been improving macro-economic policy and now they are successfully controlling the inflation rate. The study on Korean experience in this period will be worth referring for China.To study the exchange rate pass-through on the domestic price level, this article usedV AR regression analysis. The variables took oil prices, money supply, exchange rate, impo rt price index, producer price and consumer price index. Conclusion is that, firstly, oil pr ice, money supply, exchange rate factors were mostly influenced by their own variables. However, the import price, producer price, consumer price factors were more affected by external factors. Secondly, after the financial crisis, the Korean exchange rate pass-throu gh effect on domestic consumer prices has been reduced.