A Study On The Impact Of Exchange Rate On Inflation In China

Commodity price and exchange rate are important indicators for the optimal allocation of resources, in an open economic. The realization of macroeconomic internal and external balance needs a stable price system and exchange rate policy. Price and exchange rate are quantitative indicators of the internal value and external value, and their trend is consistent, in theory. However, the "double high" phenomenon in recent years, RMB appreciation and inflation coexistence, has posed a challenge to theory. Studying the driven effects caused inflation is very necessary, under the specific structure of economic growth in China.First of all, we establish the perspective of this study, through the elaboration of the symbiosis model content to world economic growth. We analyzed the characteristics of China’s economic growth under the symbiosis model. By this way, we introduced external demand, external supply, and international resource commodity prices, into the analysis framework of the factors of inflation-driven.Secondly, we divide the general consumer goods of a typical family into non-tradable goods, goods produced at domestic by using intermediate imports and purely importing goods; and we also divide the factors of production of a domestic manufactures into labor input and resources input, in this way, we extend the New Keynesian Phillips (?)rve, money demand function, and IS curve. By this, we established the theoretical framework of the study.Thirdly, we carry on an empirical analysis using the data from July2005to September2011. We analyzed the factors affecting the exchange rate and price changes. The results show that external demand shocks measured by total exports is a major factor in the changes in RMB exchange rate, but domestic prices, money supply, have smaller effect. Money supply and international commodity prices has a significantly positive impact on domestic price. RMB appreciation has a negative effect on inflation, but the variance decomposition results show that the appreciation of inhibition is limited to inflation.