Empirical Study On Relations Between Nominal Effective Exchange Rate And China's Price Fluctuations

Since 8 Jul. 2005, China, basing on the law of demand and supply of market ,have carried out the system of controlled floating rate that reference a basket of monetary. At the same year, the SAFE opened the current account. That present the prompt of comprehensive national power and the RMB gradually became a hard currency. When now, the exchange rate of RMB to USD at a exciting high level. At the same time, China Domestic Price go high around 2 years, the average rising is 4.8 percent. The first and the second matter of rising price is edible oil (52.7%) and pork (41.7%)which often consumed in our life. Price and exchange rate supplement each other. Do the fluctuating of price and exchange rate has causality? That is a question.This thesis try to study the relationship between exchange rate and price, using the vector error correct model (VEC) to search the relationship of nominal effective exchange rate, price, monetary supply, interest rate. After analyzed we have find that RMB nominal effective exchange rate only have a light upvaluation and RMB nominal effective exchange rate have a effect to inflation.We first expound some research all around world. There are two point of views. First, exchange rate effect price, RMB's upvaluation lead import higher than export, increasing import lead price fall of substitute commodity, reduce export, consequently reduce the total demand, finally make price fall. Second, price effect exchange rate, price rising effect exchange rate, one country's price rising faster than the an export country, this country's currency devaluated than export country, and vice versa. no matter witch one effect another one, most think one country have a phenomenon of upvaluation and price fall at the same time. We choose some available economic variable and weighted by trading of some country. We transform the CPI (consume price index) data to a fixed base period(2005) data. By analyze, we may find exchange rate and consume price index have a long run equilibrium. We use co integrate test and vector error correct model(VEC) to analyze. Then we may find that Public Bank of China using lending rate to control inflation have a great effort.