Asymmetric Exchange Rate Pass-through Into Manufacturing Import Prices:from The Perspective Of Vertical Division

After the collapse of the Bretton Woods system,countries generally began to adopt floating exchange rate system.Since then,exchange rate fluctuations between countries have intensified.Fluctuations in exchange rate may have significant impact on following aspects.From a macro perspective,as one of the most important participant in global economy,China has accumulated huge foreign exchange reserves year by year.Fluctuations in exchange rate of RMB have a direct impact on trade balance,and challenge the scale of foreign exchange reserves.Then,exchange rate fluctuations will lead to domestic inflation,which make it difficult to stabilize domestic prices.What's more,exchange rate fluctuations affect the stability of the financial system.The level of exchange rate pass-through has a close relationship with the efficiency of monetary policy.From a micro perspective,exchange rate fluctuations not only pass into the cost of producers through the prices of intermediate products,but also change manufacturers' pricing strategies.Chinese total trade volume in manufacturing industry is huge,and trade surplus continue to rise.It is widely accepted that exchange rate can play an important role in improving trade balance.In addition,the exchange rate of trade prices may affect national welfare by passing into domestic price.Therefore,it is quite necessary to learn exchange rate pass-through well.There is an obvious trend in the vertical division in production process.Upstream manufacturers influence the production cost of exporters through the trade of intermediate products.Exporters determine export prices of final products by a markup.This thesis uses the trade data of intermediate products from period 2000 to 2014,and then takes into account the prices of upstream intermediate products.We construct a new import price index to avoid the adoption of Import Price Index released by Bureau of Statistics.Through empirical study,we find that the degree of exchange rate passing into import prices of final products is at a high level,and is increasing year by year.It also changes in the same direction with the real effective exchange rate of RMB.In addition,this thesis confirms that not excluding intermediate products will devalue the level of exchange rate pass-through,which make it lower than the actual level.Focusing on manufacturing industry,exchange rate pass-through is lower than that of the overall import prices.Compared with agricultural industry and mining industry,exchange rate pass-through of manufacturing industry lower too.According to the differences of input factors of manufacturing industry,we find that the exchange rate pass-through of complex products is higher than that of simple products.Specifically,exchange rate pass-through is higher when RMB depreciate than appreciate,and the asymmetric effects of simple products and complex products is found different.Simple products have higher pass-through into import prices when RMB depreciates.Complex production have higher pass-through when RMB appreciates.Exchange rate pass-through is higher with big fluctuations and lower with tiny fluctuations.In order to keep the stabilization of domestic financial system,and to reduce the exchange rate pass-through into import prices and domestic price,we propose following suggestions.First,take control of domestic inflation in order to keep exchange rate pass-through at a low level.Second,making RMB a pricing currency by promoting the internationalization of RMB.Third,improve the RMB exchange rate derivatives market,and enhance the export firms' ability to manage exchange risks.