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

The pass-through effect of exchange rate on domestic prices refers to the impact of a unit of exchange rate fluctuation on the domestic price level.The original macroeconomic theory believed that an unit change in the exchange rate would cause the same level of change in price levels,which means complete pass-through,but with the development of related theories,scholars have gradually questioned the traditional macroeconomic theories and put forward the theory of incomplete exchange rate pass-through.The exchange rate,as the internal value representative of a country's currency,indirectly affects the domestic economic environment,monetary policy,domestic demand,internal and external supply by affecting the price level.However,in recent years,China's macroeconomic environment and monetary policy have continued to change:the RMB exchange rate witnessed an increasing and more frequently fluctuation after the two exchange reforms in 2005 and 2015 respectively;the price level was tightened first and then inflated sharply due to the impact of the US economic crisis and accommodative economic policies;the reform of interest rate liberalization and the further opening of the financial market swelled aggressively,leading to increasing risks and uncertainties of capital market.Against that macroeconomic background,it is of great academic and practical significance to use the latest data to study the pass-through effect of China's exchange rate.This article is composed of five parts,the first of which is an introduction thatintroduces the background and significance of the paper,research methods,and innovations and deficiencies of this article.The second part is an introduction of past theories and literature review,summing up the related studies of the effect of exchange rate pass-through on domestic prices in recent years.The third part introduces the selection of theoretical models and variable data.The empirical research is carried out in the fourth part of the article by constructing the structural vector autoregressive model and selecting S&P Goldman Sachs commodity index,industrial added value,M1,the nominal effective exchange rate index of Renminbi,import price index,producer price index,corporate goods price index,and the consumer price index as research variables to measure the effect of exchange rate pass-through on different domestic prices and to study the pass-through efficiency of exchange rate in the commodity value chain.The fifth part gives the conclusions and findings of the article based on the empirical research above,and puts forward policy suggestions based on the current macro-environment in China and the international situation,providing a new perspective for later scholars.The empirical research results of this article show that:from a chronological perspective,under the influence of exchange rate fluctuations,domestic price levels continue to be impacted and basically regain stable within 10 months,indicating that exchange rate pass-through is incomplete and lagging.Concerning the pass-through on the value chain,specifically the speed and magnitude of pass-through effect of the four different price indexes,from high to low rank import price index,corporate goods price index,producer price index and the consumer price index,whereas the pass-through effect of exchange rate is greater to corporate goods price index than producer price index.Therefore,this article believes that the management of domestic inflation cannot rely solely on the appreciation of the currency.China should stabilize prices by adopting mutli-prolonged approaches while stabilizing monetary policy,steadily promote market-oriented reform of the exchange rate on the basis of a reasonable RMB fluctuation range,and increase bargain power on energies.Only in this way can we enhance the flexibility of the exchange rate system and reduce the impact of international supply shocks on domestic prices.This paper selects the data from 2005 to 2019 for research and conducts theoretical and empirical analysis by establishing a structural vector autoregressive model.It focuses on the pass-through efficiency of the RMB exchange rate to domestic price levels after the exchange rate reform in 2005,calculates the exchange rate pass-through efficiency on import price index,corporate goods price index,producer price index as well as the consumer price index,and puts forward corresponding policy recommendations based on China's macroenvironment.This article uses data and charts to illustrate on a broad sample basis,so the conclusions and recommendations are reliable and have a solid empirical basis.