The Research On Rmb Exchange Rate Pass-through Into Domestic Price Level

Exchange rate represents the external value of a country's currency and domestic price level represents the internal value of a country' s currency.According to the theory of law of one price and purchasing power parity,there exist some connections between currency's internal value and external value.More specifically,the appreciation of currency could plays a vital role in restraining the increase of domestic price level,so it's consider that the increasing exchange rate has the function of restrain inflation.On the contrary,the depreciation of currency could promote the increase of domestic price level and result in inflation.But after the implement of RMB exchange rate regime reform in July 2005,the RMB exchange rate was in a decrease channel for a very long time accompanied by domestic inflation stay in a high position without going down,which is an opposite phenomenon of traditional economic theory that we called RMB's "external appreciation and internal depreciation".This phenomenon attracted lots of academics to do research on it.Exchange rate pass-through is an important mechanism to realize international macroeconomic conduction,the study on exchange pass-through can not only help us have a more clear clue about the nature of volatility of macroeconomic variables,but also supply reference value to government so as to stable domestic price with more appropriate policy.This paper has five parts,the arrangement are as follows:The first part is introduction,introduces the research background,research significance,methods and structural as well as innovation and shortcomings.The second part introduce studies of exchange pass-through to price from complete and incomplete aspect,analysis micro and macro reason which influence exchange pass-through effect.Moreover,this paper carding studies on this problem in empirical angle.The third part is theoretical analysis,which focus on the different influence of direction and extend of several channel of exchange pass-through effect,then the review of the change of exchange policy and price level could display a direct view of the relation between RMB exchange rate and domestic price level.The forth part is empirical analysis,this part using nonlinear auto-regression distributed lag(NARDL)model to analysis the relationship between RMB nominal effective exchange rate and domestic price level during the period Jan 1997 to Aug 2016.Taking consumer price index and producer price index as proxy variable of domestic price level,we mainly focus on two aspects,the one is compare the extent of influence between long time and short time,another one is the asymmetry of exchange rate's shock.Additionally,we set the time of reform as a boundary and compare the exchange rate pass-through effect before and after the reform.The fifth part is conclusion and policy proposal.On the basis of analyze before,this paper come up with several relative policy proposal.It's not wise to rely on controlling exchange to stabilize price level and it's more effect to use diversified policy instruments comprehensively;In consideration of countries' economic connection more and more tight under the circumstance of economic globalization,governments could reinforce international cooperation to handle price fluctuation;Establish a more thorough and elastic RMB exchange rate formation mechanism to make exchange rate play a better role in resource allocation.The main conclusions of this paper are as follows:The pass-through effect of RMB nominal effective exchange rate is small,meaning the pass-through effect is incomplete,and some lag coefficients are significant,which means the process is time lag.From whole perspective,there is negative relation between RMB exchange rate and domestic price level,so the appreciation of RMB could restrain the increase of price,but the function is limited.From empirical analyze,we can draw the conclusion that RMB exchange rate has influence on CPI and PPI in the long run,the appreciation of RMB could lower domestic price level,but the influence extent is not significant,the asymmetric effects mainly reflects in that CPI is more likely to be affected by RMB depreciation,but PPI is impacted by RMB appreciation mostly.Secondly,the negative change of RMB exchange rate has a tight relationship with CPI in the long run before the exchange rate reform,but it turns out that greater impact would imposed on CPI in the short run after the exchange rate reform.Moreover,it doesn't display asymmetric effects among RMB exchange rate and PPI both before and after the reform.The innovation of this paper are as follows:Firstly,we ease the hypothesis of linear,take consideration of the sticky price in reality economy,and the adjustment of price could overreact or underreact,this paper apart the positive change of RMB nominal effective exchange rate from negative change,test the influence to price level respectively,this could help us recognize the asymmetry characteristic of exchange pass-through effect to price level;Secondly,we analyze the long time balance and short time adjustment relation simultaneously,so the result of this research has more persuasion.