Pass-through Of RMB Exchange Rate To CPI After The Exchange Ratereform

This paper introduces the theory of the relationship between exchange rate changes and goods price, and tease the transmission mechanism of exchange rate changes on prices. Using of the monthly data from January 2006 to December 2014 after the RMB exchange rate reform, we set the Vector Auto Regression model of second order, which includes the price of crude oil, output gap, money supply, nominal effective exchange rate, import price index and the consumer price index as endogenous variables. Granger causality test, impulse response function, variance decomposition techniques are used to explored the dynamic interaction among endogenous variables in each model.Statistical results show that the nominal effective exchange rate reacts in opposite direction with the consumer price index. Specifically, the consumer price index has reverse effect when the nominal effective exchange rate has one standard deviation positive shock. About 1.18% of the volatility can be explained by the changes in the nominal effective exchange rate of RMB. That is to say the exchange rate passed to the consumer price index is incomplete after the reform of RMB exchange rate. The degree of the impact of endogenous variables in the model are consumer price index, money supply, output gap and RMB nominal effective exchange rate. And the minimal factor is nominal effective exchange rate. Combined with theoretical analysis in this paper, the results of real investigation and empirical analysis, this paper draws the following policy recommendations: Firstly, maintaining the stability of the RMB exchange rate in order to avoid direct or indirect impacts on the consumer price index due to change in foreign exchange. Secondly, deepening the reform of RMB exchange rate system. Thirdly, strengthening the effectiveness of monetary policy. Fourthly, manage the expectation of inflation effectively.