Research On The Pass-through Effects Of RMB Exchange Rate

With the advancement of interest rate marketization and the development of financial innovation,the monetary supply,as the intermediate target in China,can not fully reflect the relationship between the financial and the real economy.As an important macroeconomic variable,exchange rate is more controllable and measurable.Besides,exchange rate can also affect the balance of payments and domestic prices.Therefore,compared with money supply,exchange rate may be the better intermediate target.This paper will discuss the feasibility of exchange rate as the intermediate target by studying the pass-through effects of exchange rate.The research on the pass-through effects of RMB exchange rate contains both qualitative and empirical aspects.In the qualitative aspect,the direct and indirect transmission mechanism of exchange rate to domestic price is analyzed.Moreover,The complete pass-through theory and incomplete pass-through theory are explained in detail.From the perspective of empirical test.We selected the monthly data from 1996 to 2017,based on impulse response to estimate the pass-through coefficient of RMB exchange rate.In addition,We use variance decomposition method to explore the contribution of the exchange rate shock to domestic price changes.In particular,this paper focuses on the changes of pass-through effects after the reform of exchange rate regime in 2005.As a supplement,the pass-through effects of classified CPI and PPI will be discussed.According to the results of qualitative analysis and empirical test,this paper confirms the incomplete pass-through effect between the RMB exchange rate and domestic prices.Specifically,the RMB exchange rate has the strongest pass-through effect on import prices,followed by producer prices,and the pass-through effect on consumer prices is the least one.After the reform of exchange rate regime in 2005,the pass-through effect has been significantly improved.Furthermore,there was a certain difference in the pass-through effect of classified price index.