Research On The Effect Of RMB Exchange Rate Pass-through On Domestic Prices In China

The effect of exchange rate pass-through is the influence of domestic price brought by exchange rate fluctuation.Traditional economic theory believes that the effectiveness of exchange rate pass-through is totally complete,which means that the exchange rate fluctuation would cause proportional change in domestic price level.However,recent research in microeconomics and new open macroeconomics reviews that this transmit could be incomplete.The effect of exchange rate pass-through not only give impact on domestic price,but also play an important role in domestic economic environment,monetary policy formulation,balance of international payment.Therefore,there was a tremendous change in Chinese economic environment and monetary policy in the last decade.Due to the exchange rate regime reform in 2005 and the following incensement of vibration frequency and range of RMB exchange rate,Chinese price level has been showing a tight situation affected by the economic crisis in the United States.A hyperinflation happened later since the loose economic policy,following with sharp fluctuation of the inflation level in China.The interest rate liberalization in China has basically been finished,meaning that capital market must be faced with more challenge.With the profound reform and opening-up policy,the risk of impact with global economic shock has been increased.In this economic situation,the evaluation and measurement of the exchange rate pass-through could be significant and meaningful for China.This paper has five parts: the first part is the introduction.In this part,we introduce the background and the significance of this paper,then give the advantages and disadvantages of our research approach.In the second part,which called literature review,we introduce the basic economic concepts,related theories,and research results in recent years.In the third part,the main theoretical model,application model and the test methods details would be given.The fourth part is called empirical study.In this part,we introduce the structural vector auto regression model,having the world commodity energy price index,the industrial added value,the broad money supply M2,the nominal effective exchange rate index,ex-factory price indices of industrial product and the consumer price index CPI as research variables.Using classified PPI and CPI data,we calculate the pass-through effectiveness of the RMB exchange rate towards several different kinds of commodity.In the fifth part,we analyze current economic situation with the model presented in this paper and give corresponding suggestions for policies.It is reviewed by the empirical study of RMB exchange rate pass-through effect that,the RMB exchange rate change would gradually impact on the domestic price level.The impulse for domestic price would turn out to be stable in two years.The effect of exchange rate passthrough is incomplete with time lag to some extends.The transmission efficiency of RMB exchange rate volatility for PPI is shaper compared with the one for CPI.Regarding the classified PPI,the reaction of the price of means of production to exchange rate shocks is generally higher than that of livelihoods.The raw materials industry has the highest transmission efficiency,followed by the extractive industry,the third is the processing industry.As for the means of livelihoods,the transmission coefficient of general merchandise,food and clothing are in a decreasing order.The regression of CPI shows that the transmission efficiency decreases in the following order: foods,household facilities articles and services,health care and personal effects,living,traffic,communication,entertainment education cultural supplies and services,cloths,alcohol and tobacco.Among them,the transmission efficiency for foods and household facilities articles and services is greater than total index.Therefore,it is insufficient only making RMB appreciation to govern the inflation in China.A credible monetary policy is in urgent need to stabilize the domestic price.In the same time,other policies including reasonable interval setting for RMB exchange rate,exchange rate marketization reform and effective management for the inflation expectation and the food inflation could help decrease the external impulse.This paper chooses data in the recent 12 years to build the SVAR model.The combination of theory analyze and empirical study with wide range of sample data has given a convincing result with diagram instruction,showing the effect of RMB exchange rate pass-through since the exchange rate regime reform in China.This paper gives a calculation and analyze for transmission efficiency of RMB exchange rate for both PPI and CPI.At last,based on the analysis of Chinese current macroeconomic environment,this paper give some political suggestions which have certain practical significance in nowadays economic situation.