The Study Of The Exchange Rate Pass-through Of RMB

In both academic and practical researches of exchange rate, most of them have concerned about the impact of exchange rate changes to the country's internal and external equilibrium and economic growth, and trade balance is a key side of them. Classical theory of the trade balance is built on the "Law of one price", which means that the depreciation of a country's exchange rate will reduce the prices of its export products measured by foreign currency. As a result, it will increase the export while decrease the import and thus improve the domestic trade balance. When the real situation contradicts this theory, economists try to find out its validity condition, the most famous ones of which are Marshall-Lerner and Robinson-Metzler Condition. Additionally, some other scholars explain it from different viewpoints, considering that the "Law of one price" is invalid in real economy. This paper will follow this idea and reveal the reasons why the import price change is not proportional to the exchange rate change, which means that the exchange rate pass-through is incomplete.Specifically speaking, the theoretical analysis introduces Dixit-Stiglitz Constant Elasticity of Substitution Utility Function to discuss the factors including both foreign and domestic firms' traded good prices, demand, market occupancy, marginal cost and exchange rate, which influence the exchange rate pass-through elasticity under the framework of imperfectly competitive market. The result indicates that the incomplete exchange rate pass-through is universal given that the market is imperfect and the pass-through degree to the import prices is more significant than it to the total price level. Furthermore, the pass-through degree is inversely proportional to the substitution elasticity between foreign and domestic goods. However, how the market occupancy causes effect to the pass-through degree is unsure, which is different from the view that it's inversely proportional to the pass-through degree. Then the empirical analysis uses VAR model to inspect the pass-through degree of ten different specific industries based on the theoretical analysis and the results are basically consistent with the anticipation. Although the respective CPI and WPI data of the ten specific industries are unavailable and have to be replaced by the general ones which may affect the accuracy, general conclusions of this paper are still conceivable.