Study On The Effect Of Pass-through From Exchange Rate To Prices Of China And USA

Open economic environment is an important factor for fast development of economy in contemporary society. In the global market, domestic policy and economic variables are impacted by some international factors. Being one of the factors, Exchange rate volatility affects prices by the way of international trade and capital flow, directly and indirectly. Prices have great impact on people’s life and on the sustainability of economic growth, so it has a great sense to study exchange rate pass-through.There are literatures of exchange rate pass-through overseas after the implementation of the floating exchange rate system. Domestic studies on exchange rate pass-through have a shorter history dating back to the reform of exchange rate regime, i.e. the emergence of managed floating exchange regime.This paper studies the pass-through effect of exchange rate change to prices, including several parts:influencing factors of prices, the trend of exchange rate change, the channel and effect of exchange rate pass-through, and the time span of exchange rate pass-through coming into great effect. In addition, this paper also finds the similarities and differences of exchange rate pass-through between China and USA. It is comprised of five sections.Section I states the research background and research significance first. Then this section reviews articles about the exchange rate pass-through from four aspects, including factors influencing the pass-through, effect and degree of exchange change pass-through, the trend of change of exchange rate pass-through, and the other aspects.In Section∏, it introduces the traditional theory of exchange rate pass-through. It thinks that exchange rate change can pass through completely. However, the prerequisite of traditional theory hardly exists in real world, so the incomplete exchange rate pass-through theory comes into stage. Then this section states five macro bases of incomplete exchange rate pass-through theory. Two micro base models of incomplete exchange rate pass-through theory are analyzed at the end of this section, which are pricing to market theory and market share theory. The former one proves that exchange pass-through is incomplete when demand function is linear. However when demand function is nonlinear the pricing to market mode cannot prove it. The market share theory model proves that exchange pass-through is incomplete when facing the linear demand elasticity, which makes up for the model of pricing to market.The analysis in section Щ is the trend of nominal exchange rates change of China and USA. Then the channels of exchange change rate pass-through are studied, including direct and indirect channel. The end of this section amplifies the indirect pass-through channels, which are demand channel, supply channel, mixed channel of demand and supply, and money channel.Section IV is the empirical part. This paper chooses seven variables, including prices and exchange rate. The time span of the data is from1to12month,1996to2012. The data pass the ADF test, co-integration test and Granger test. This paper employs the co-integration analysis, impulse response function and variance decomposition to analyze the exchange rate pass-through. This section analyzes the pass-through order, short and long effect of the exchange rate pass-through, and how long it takes when pass-through effect gets to the peak. This section also measures the degree of contributions to prices made by exchange rate, comparing with other variables. Comparison of exchange rate pass-through to prices of China and USA is made in this section as well. The end of this paper provides some advice.