An Analysis About The Conduction Mechanism Of RMB Exchange Rate Change On Chinese Domestic Prices

For now, persistent rise in domestic prices appears in China. The CPI average rose by 3.2% in 2010. In January 2011 CPI increased 4.9% year-on-year. Meanwhile in 2010.the RMB exchange rate against the U. S. dollar appreciated 3.1% and the RMB real effective exchange rate increased 5.5%.In addition, China's foreign trade accounted for gross domestic product (GDP) more than half. Facing this series of numbers, people inevitably wonder if the appreciation of the RMB had pushed up domestic prices to a certain extent.This article has a try to answer the question above and further analyze the transduction pathway of the RMB nominal effective exchange rate to our domestic price level.. Since reformation and opening, China's exchange rate system had reformed for six times. At present, the system is based on market supply and demand, the reference to a basket of currencies adjust, managed floating exchange rate system and People's Bank of China and scholars begin to pay more and more attention to how to continue to reform the system with a high level of inflation expectations in China. This paper also talks over this.Firstly, the thesis introduces the background of the researches on RMB exchange rate pass-through to domestic price level. The next is domestic and international literature review which helps find the points to start with and the basic line:the model can be established including both macro and micro angles and the volume of pass-through, as well as the transfer pathway, will need further analysis.Before establishing model and empirical analysis, there is relevant theoretical analysis, which includes the introduction of the status of China's exchange rate system and the characteristics of price mechanism: at present China's exchange rate system is based on market supply and demand, the reference to a basket of currencies adjust, managed floating exchange rate system; Since reform and opening up the domestic price level in China has been overall rising with Internal structure imbalances. Following is the theoretical analysis of the influence from RMB nominal effective exchange rate to domestic price level, by two aspects -the current account and capital account, finding that RMB nominal effective exchange rate in certain degree will reduce domestic price level. Finally using 1994-2010 RMB nominal effective exchange rate and the three price index trend diagram to analyze the overall vacancy trend between RMB nominal effective exchange rate and domestic price level, in order to verify the effectiveness of front conclusion qualitatively.Then is establishing a model and having empirical analysis. The model is established according to trading volume said of money demand theory. Next are Series of quantitative analysis, such as Stationary Test, Co-integration Test, Granger Causality Test, Impulse Response, Variance Decomposition and so on. The quantitative analysis tells us:RMB appreciation can actually reduce domestic price level, but the force is smaller than other factors; The transfer rates from RMB exchange rate to seven categories of price index are different obviously, for example, the transfer rates to Food, family equipment supplies and services, transportation and communications are positive and the transfer rates to production material price index is bigger than to life material price index; Price transmission path of RMB exchange rate pass-through is clear, however, money supply transmission path and total supply - aggregate demand transmission path is obstructed.Finally, the thesis summarizes the whole paper and digs deep into above conclusions especially the conclusions of empirical analysis. Based on findings above, the research puts forward the following relevant policy recommendations: maintaining RMB exchange rate stability, reforming the system of exchange settlement and sales, adjusting the export structure, and adjusting price according to classification price index.