The Rmb Exchange Rate Changes The Transfer Effect Research Of Domestic Prices

With the anticipation of RMB appreciation, the continuously rising domestic price and the urgency management of inflation, there is a view supporting to lower the price by the appreciation of RMB, that is to say, to achieve the price stability by using exchange rate policy. However, whether this view is correct depending on two conditions:Firstly, the RMB appreciation has significant negative effects on declining domestic price; Secondly, exchange rate fluctuations will not bring huge impact on domestic economy. Therefore, this article mainly focuses on the relationships between RMB exchange rate and the domestic price, researching the pass-through effect of RMB exchange rate both theoretically and empirically.Followed by reviewing the theory of exchange pass-through and statistically analysing of RMB exchange rate and price movements in2005-2010, this article uses monthly data to analyze the pass-through effect of RMB exchange rate on domestic prices by using the cost make-up model. To highlight the importance of import channels in exchange rate pass-through, this paper constructs the nominal effective exchange rate and foreign price level, which are weighted by the shares of imports to measure the RMB exchange rate and the external shocks. This empirical analysis includes both long-term trends analysis and short-term fluctuation analysis. The long-term cointegration analysis results show that the relationship between RMB exchange rate and prices is negative.1%appreciation of RMB will bring down domestic price by0.1%. The exchange rate pass-through effect on domestic price is incomplete and the degree is exactly small. The short-term fluctuation analysis finds that the response of domestic price to one positive standard deviation of exchange rate shock is overall negative as well. The biggest response is about0.17and the contribution of exchange rate volatility to the price fluctuations is not high too. In addition to its own fluctuations, most domestic price fluctuations come from the fluctuations of domestic demand, foreign price fluctuations and so on. The conclusion of the analysis is whether in a long-term analysis or in a short-term analysis, the RMB exchange rate pass-through effect on domestic prices is existing, althrough it is small. This low exchange rate pass-through effect on prices provides supports for the flexible exchange rate system and market-oriented reforms, providing the policy direction to control the rising domestic price.