The Research Of RMB Exchange Rate Pass-Through

Exchange rate pass-through effect is defined as exchange rate change impacted on thedomestic prices. In this paper, I researched the RMB exchange rate pass-through effect sincereform in July2005, and divided it into two main parts: Firstly I estimated the levels of RMBexchange rate pass-through effects, Secondly analyzed the factors of incomplete RMBexchange rate pass-through. In the first part, I selected three price indicators: consumer priceindex, enterprise commodity prices and import prices for the research of exchange ratepass-through effects, and used sign restriction SVAR model. In the second part, I discussedthe factors of incomplete exchange rate pass-through effects from the perspective of exchangerate under(over) estimation correlated with debate of RMB exchange rate under(over)estimation, and he perspective of exchange rate fluctuation risk correlated with the reform ofRMB exchange rate regime. I concluded RMB exchange rate pass-through effect had lowlevels, hysteresis effect and large difference in different price indexes features, RMBunder(over) estimation could explained a certain degree of incomplete RMB exchange ratepass-through;The more elasticity of exchange rate would improve the RMB exchange ratepass-through effect; and price stickiness and monetary policy were the main factors ofincomplete exchange rate pass-through. Last, I put forward suggestion of accelerating thereform of RMB exchange rate and improving the elasticity of exchange rate, managing theinflation based on the conclusions.In this paper, it’s contained6parts,Chapter1, Introduction. Background, Significance of Research, Basic ideas, Innovationsand Main arguments.Chapter2, Theory and literature exchange rate pass-through effect reviews. Its containedfour parts: the meaning and mechanism of exchange rate pass-through; theory and literaturereviews; and new process of research in exchange rate pass-through.Chapter3, the level of RMB exchange rate pass-through effect estimation. This chapteraimed to make a whole estimation and understanding of RMB exchange rate pass-throughsince the reform of RMB exchange rate pass-through effect in July2005. I selected three priceindexes consumer price index, the enterprise commodity prices and import prices, and usedsign restriction SVAR model to eliminate the phenomenon of deviation from economic theorythat lower the level of exchange rate pass-through effects in earlier study, and estimated themore real level of RMB exchange rate pass-through. Its concluded that RMB exchange ratepass-through effect had low levels, hysteresis effect and large difference in different price indexes features.Chapter4, RMB non-equilibrium exchange rate and exchange rate pass-through. In thispart, I used Ghosh and Rajan(2006) exchange rate pass-through effect model, and testifiedexchange rate pass-through effects is naturally incompletion when the exchange rate hadunder or over estimation. And use the theory into RMB exchange rate pass-through research,Firstly estimating the level of under or over estimation of RMB exchange rate used the BEERmethods between July2005and April2012. Secondly used Campa and Goldberg(2005)import goods price exchange rate pass-through model, empirical analyzed the level of underor over estimation of RMB exchange rate impact on consumer price index, the enterprisecommodity prices and import prices. Its concluded, RMB under or over estimation couldexplain a certain degree of RMB exchange rate pass-through incomplete effect.Chapter5, RMB exchange rate fluctuations,sticky prices and exchange rate pass-througheffect. Borrowed Devereux, Yetman(2010) sticky price small open macroeconomic exchangerate pass-through determinate model, added the exchange rate fluctuation risk variables toexpand the model, and solved expression of exchange rate pass-through effect under theforeign interest rate shock, monetary policy shock, technology shock and exchange ratefluctuation shock. Take RMB as an example, I estimated the value of variables in the model,and calculated the level of RMB exchange rate pass-through. Last I relaxed the model relatedvariable values under different shocks, in order to analyze the influencing factors ofincomplete RMB exchange rate pass-through. Its concluded, price stickiness and monetarypolicy were the main factor of incomplete exchange rate pass-through effects, the moreelasticity of RMB exchange rate pass-through could improve the exchange rate pass-througheffect, but the more elasticity exchange rate mean higher exchange rate risk in the process ofenterprise operation, and it would affected the exchange rate pass-through.Chapter6, Main conclusions and Policy suggestions.