Analysis Of Impact Of The RMB Exchange Rate Fluctuations On The Domestic Price Level In China

As an important macroeconomic environment variable, Exchange rate has a profound impact on the national economy. This paper aims to analyze the RMB exchange rate pass-through to price levels in China. The traditional international economic theory suggests that exchange rate fluctuations will be reflected in proportional change in the price level, above which the exchange rate transmission is complete. Increasingly, however, facts have proven that the price of a country’s pass-through is often incomplete. In2005, after the exchange rate reform, the RMB exchange rate fluctuates more frequently and deeply. It is worthy of our in-depth analysis that how and how much the RMB exchange rate fluctuations influence domestic price, therefore the macroeconomic environment. So inspection and analysis of the RMB exchange rate pass-through acts for China is of great significance to develop sound monetary policy.This paper has reviewed the literature at home and abroad, and established a VAR model based on the actual situation against China. The variables include RMB nominal effective exchange rate, Consumer Price Index, Producer Price Index, International crude oil prices, Industrial added value and Money supply. With the establishment of vector autoregressive models, this paper uses impulse response functions and variance decomposition method to analyze the response of domestic price level to each variable and the degree of the variables contribution to the variance.The innovation of this paper is that comparing the impact of exchange rate on the price level before and after the change of exchange rate policy in July2005, found that the impact of RMB nominal effective exchange rate of CPI is positive, but the effects of this shock after the exchange changed is negative. China’s exchange rate policy reform in July2005has played a significant role in the RMB exchange rate impact on the domestic price level.