The Yuan's Purchasing Power From The Empirical Research

Since the RMB exchange rate reform, the inside and outside purchasingpower of RMB has been in a deviation for a long time which is not consistentwith the viewpoint of classical economics. This paper indicates the insideand outside purchasing power of RMB with all kinds of domestic prices andexchange rates, respectively. Discuss the deviation of internal andexternal purchasing power of Yuan from the two aspects of theoreticalanalysis and empirical analysis and from the angle of transfer effectbetween the various types of domestic prices and exchange rates. From thepoint of view of supply and demand theory, the rise in exchange rate willlead to the decline of domestic price level through transmission mechanism;and rise in the domestic price level will also enables the exchange ratedecline through the relationship between supply and demand. From theperspective of capital flows, the exchange rate rise will lead to risingdomestic prices and inflation; price level rose by capital flows will alsolead to the exchange rate. While exploring the reason of what can impactthe inside and outside purchasing power of Yuan, the writer found thata huge amount of trade surplus and foreign exchange reserves are the maincauses to the appreciation of Yuan. Besides, foreign exchange reserves,FDI, international prices and the global economic environment and manyother factors will also affect the fluctuations of domestic price level.This paper selected nine variable: the gross domestic production(GDP),investment in fixed assets, foreign exchange reserves, the real effectiveexchange rate, money supply, consumer price index, producer price index,retail price index and import price index for VAR model, examined thepass-through effect between the effective exchange rate and domesticprices and variable impact on the contribution of the effective exchangerate and domestic prices by the impulse response functions anddifferential decomposition. The estimated results show that the transferbetween the effective exchange rate and all kinds of domestic prices isincomplete, and there are asymmetries. The impulse response analysisshows that from pass-through effect of all kinds of domestic prices onthe effective exchange rate in the short term, the impact of the importprice index and consumer price index will cause negative response to the effective exchange rate, the impact of producer price index and retailprice index will cause positive response to the effective exchange rate,and changes in the positive and negative cross in the long run. And theimpact on exchange rate caused by import price index and retail price indexis greater than the producer price index and consumer price index. Analyzefrom the effective exchange rate pass-through effect of the various typesof domestic prices, exchange rate shocks on the impact of various priceindices are negative. Among these, the short-term response to exchangerate shock by import price index is the greatest; the transfer effect ofthe consumer price index is the weakest. In the long run, the impact ofexchange rate shock on the import price index, producer price index andretail price index is negative, but the impact on the consumer price indexis positive. Overall, the pass-through effect of effective exchange rateon the various types of domestic prices is greater than all kinds ofdomestic prices on the effective exchange rate. Therefore, thefeasibility of the inhibition to the domestic price level by raising theexchange rate is worth exploring.Variance decomposition shows that the self impact and foreignexchange reserves shock are the main factors of the effective exchangerate changes. The impact of various price indices on the exchange rateis small, their contribution by the retail price index is the greatest,import prices weakest relatively. The main factors which affect thedomestic price level are foreign exchange reserves shock, the effectiveexchange rate impact, and fixed asset investment impact, which have thegreatest contribution on are the import price index, producer price indexand foreign exchange reserves. The greatest impact of the retail priceindex is from the impact of investment in fixed assets, ranked second inthe foreign exchange reserves. Changes in the consumer price index arethe impact of investment in fixed assets (25%), the impact of money supply(15%) and CPI impact. The contribution of effective exchange rate impactto various price indices is far greater than the contribution with theother way round. Finally, this article suggests focusing on theimplementation of effective long-term monetary policy to control thestatus of the domestic currency, rather than by raising the exchange rate to curb inflation. In addition, by controlling the foreign exchangereserves increase, improving the international status of Yuan,strengthening the supervision of the investment in fixed assets andadopting other strategies can up to the adjustment of the RMB of internaland external purchasing power differences.