Analysis On The Effects Of RMB Exchange Rate Pass-through Into Import And Export Prices

Exchange rate, as the external price of a currency, is the core variable of a country’s economic internal and external balance adjustment. Exchange rate changes will directly cause the relative change of import and export commodities, and further lead to a country’s trade balance adjustment by means of expenditure switching effect. In addition, changes in import and export prices caused by exchange rate changes will also result in the change in a country’s general price level, and then impact on a country’s macro economy. As a result, the issue of exchange rate pass-through (ERP) has always been a hot spot of academic research.The research objects of foreign scholars on ERP are mainly focused on developed economies, while domestic scholars’ research perspectives take China’s overall external ERP as the principal thing. The studies on bilateral ERP are mainly focused on China and the United States. The development process of China’s foreign trade keeps changing. The competition on the international market has also undergone subtle changes. The impact of major trading partners on China’s economy is rather considerable. Under this background, the research object of ERP should be widened and developed. In2012, the European Union remained China’s largest trading partner and largest source of imports. While both sides remained a harmonious and stable trading relationship, there also existed frictions and conflicts. Whether ERP can adjust trade balance, above all, depends on whether the price adjustment on imports and exports is effective. Therefore, it is necessary to conduct research on the ERP between China and Eurozone countries.This paper, based on previous studies, takes an ERP perspective on China and Eurozone countries, to unfold discussions throughout the paper. This paper is divided into five parts. Part One is introduction, which introduces the research background and significance of this paper, sorts out the domestic and foreign studies on ERP, introduces and presents innovation and shortcomings of the framework and contents of this paper. Part Two is the basic theory, which first defines ERP and then explores factors affecting ERP from the perspective of market structure, market shares, pricing methods and exchange rate changes. Since the research object of this paper is China and Eurozone countries, Part Three expounds on the development process, status quo, import and export structure, as well as the development trend of exchange rate. Part Four is also the core part of the whole paper, namely, an empirical study on the pass-through effect of RMB exchange rate changes on import and export prices. For ERP studies, the explanatory variable is import and export price index. Since there is no official bilateral import and export price index, this author constructs price indices innovatively through unit value, with Fisher Ideal Index, which to a certain extent, reflects the changes in price level. Empirical studies are divided into two dimensions, the pass-through effect of export and import prices, to carry out short-term and long-term effect studies respectively. In short-term analysis, the import and export price index is built into a VAR model with exchange rates respectively, with different pricing methods. Granger Causality Test shows that export price index priced in RMB doesn’t present Granger causality with exchange rate, while export price index priced in Euro and import price index priced in these two currencies all present Granger causality with exchange rate. This contains rich economic connotations. In the face of short-term exchange rate fluctuations, the different responses of traders in two countries are based on the different market structures that they face, as well as the different competitive pricing methods of commodities in these two countries. Long-term equilibrium relationship, however, shows that the pass-through coefficient of China’s export commodity price to Eurozone is only0.32, while that the pass-through coefficient of China’s import commodity price to Eurozone is up to0.95. This presents "asymmetry". Part Five is conclusion and suggested policies, which analyze factors affecting ERP between China and Europe through empirical results and draw relevant policies.