Research On The Correlation Between RMB Exchange Rate And Inflation In China

Since joining the WTO. RMB exchange rate volatility increases, the linkage of the change of RMB exchange rate and price level changes significantly enhanced. Especially after2005year when the RMB exchange rate system reform, the flexibility of the RMB exchange rate enhancement, however, has the RMB exchange rate change influence on price level? And what is the impact on inflation? This is very important for formulation of our country monetary policy and exchange rate policy.Therefore; it is significant to research on the relationship between RMB appreciation and price level。In order to explore the relevance of the RMB exchange rate and inflation in China, the paper adopts research methods of qualitative analysis and quantitative analysis, on the one hand, qualitative analysis the correlation among some economic variable and domestic inflation, and the use of a large number of charts to show; on the other hand, quantitative analysis the relationship between exchange rate and inflation, to research the impact of exchange rate system reform, using the method of comparison, and to reveal how the exchange rate system reform impact on China’s exchange rate pass-through; In the sample selection,This paper first choice the overall sample of before and after the reform of the RMB exchange rate system as the research object, studies the impact of RMB exchange rate to the inflation in China. However, after2005, influenced by the reform of the RMB exchange rate system, the RMB exchange rate to rise sharply, at the same time, appeared serious inflation. In order to study the reform of RMB exchange rate movements on the price level, this paper further investigates the relationship between RMB exchange rate and inflation in China after the reform of RMB exchange rate, and compared with the former, to reveal the RMB exchange rate system reform how to effect on the domestic price level.The main contents of that chapters and viewpoint: Chapter1is the introduction section, including the meaning and purpose of this research, as well as literature reviews, introduces the paper’s structure and research method, points out the innovation and deficiency.Chapter2reviews the related theory. Firstly, introduces the law of one price and purchasing power parity theory to explain the change in the price level effected by exchange rate changes, the second, to explain the incomplete transfer phenomena in the process of exchange pass-through; therefore this paper further analyzing the exchange rate pass-through effect factors from the micro and macro perspective; finally, discusses the transmission mechanism of exchange pass-through, including the direct transfer mechanism and indirect transfer mechanism, these theories provide theoretical basis for explaining the correlation between exchange rate and inflation of the real life.Chapter3reviews the change of RMB exchange rate regime, qualitative analysis of influencing factors of China inflation, the focus is based on graphics and intuitive analysis, through describing the trend of consumer price index and the characteristics of the past few years prices level, combined with the basic knowledge of pass-through theory and the theory of inflation, qualitative research the relationship among the domestic price, exchange rate, Marshall K index and international commodity prices, and further analysis of the transmission mechanism of various factors on the price changes.Chapter4studies the relationship between the effective exchange rate of RMB and China’s inflation from empirical perspective. On the basis of the previous chapters, selects the demand, currency, external input corresponding variables, establishes the index system about related domestic price fluctuation of price and the effective exchange rate of the RMB; therefore, the first section of this chapter starts with the introduction the model and method; mainly includes:the autoregressive model (VAR), vector error correction model (VEC), the ADF unit root test, Johansen co-integration test, Granger causality test, impulse response function and variance decomposition. In the empirical analysis, first of all, using ADF unit root test selected time series; secondly, using Granger causality test to test the economic significance between variables to prevent the emergence of false regression; again, using Johansen co-integration test to determine whether variables has the common changes trend in long-term, established the vector error correction model to analysis the short-term fluctuation effects on long-term equilibrium; then using impulse response function to analyze the process of any economic variables’ disturbance through the economic model effects other variables, and then feedback to itself; at last, using variance decomposition to analyze the impact of the contribution of a structure on the endogenous variables change. In the content arrangement, this paper use VAR model and vector error correction model (VEC) to study the correlation between nominal effective exchange rate of RMB and China’s inflation during2001January to2012June, co-integration test and vector error correction model display, domestic inflation, Marshall K index, exchange rate and international commodity prices have stable equilibrium relationship in the long-term, in the long term, the RMB appreciation can be certain inhibitory action to the domestic inflation. The pulse results showed that response of RMB nominal effective exchange rate pass-through on domestic prices is not complete and there is a certain delay. Through variance decomposition of the consumer price index, the consumer price index, the nominal exchange rate of RMB, Marshall K index and international commodity prices are the main factors leading to consumer price fluctuation. Secondly, in order to investigate the influence of the reform of the RMB exchange rate on exchange rate pass-through, empirically examines the change of transmission effect of RMB exchange rate after the reform of RMB exchange rate using the structure of VAR model, to effectively grasp the current exchange rate changes impact on domestic prices, the co-integration test show, The reform of the RMB exchange rate can reduce inflationary pressure, variance decomposition found that, since the reform of RMB exchange rate the domestic price changes can be explained very well; international commodity price shocks explain further enhanced; it shows that the RMB exchange rate appreciation for easing the pressure on domestic inflation has a certain effect. In view of the Marshall K index is always the main influence factors of domestic inflation, therefore, control the growth of money supply and maintain appropriate growth rate of China’s economy will also help to reduce the level of inflation in china.Chapter5is the policy recommendation. According to the results of theoretical analysis and empirical research, put forward relevant suggestions from three aspects:reform of the exchange rate system, the goal of monetary policy and energy utilization strategy; first, appreciation of the RMB to curb domestic inflation has a certain effect, but it is limited, however, in the long perspective, it is a powerful means to adjust economic structure and stable the domestic economy; second, the central bank’s monetary policy should focus on the price stability, so as to avoid multiple targets dilemma in monetary policy; last, establishing long-term strategic use of resources should be considered in a long-term vision, to reduce the impact of external shocks on domestic prices.