The Research On Pass-through Of RMB Exchange Rate Changes To The Agricultural Prices In China

Our country is a big importing and exporting country of agricultural products andtrade scale increases rapidly. The prices of Agricultural products have a large growthrate and volatility. In2013, the import value of agricultural products was117.91billion U.S. dollars (an increase of5.8%) and the export value of agricultural productswas$67.1billion (an increase of7.2%). In November2008the wholesale price indexof agricultural products increased to199.1. The index was100in2000, it almostdoubled. According to international trade theories, exchange rate changes have asignificant impact on a country’s import prices and domestic commodity prices. InJuly2005, the People’s Bank of China announced that the RMB was no longer peggedto the dollar. China began to implement a market-based, with reference to a basket ofcurrencies, a managed floating exchange rate system. After the reform, as of February2014, RMB has appreciated more than35%. The Party’s18th report had made it clearthat solving the rural problems was the most important work. On the one hand,research on the RMB exchange rate pass-through effect of agricultural product priceshelps stabilize the prices of agricultural products and the domestic prices. on the otherhand, it helps promote farmers’ income, accelerate the development pace of China’sagricultural modernization, enhance Agricultural production capacity and ensure theeffective supply of major agricultural products.According to the theory of purchasing power parity proposed by Cassel(1992)and Kenny&McGettigan’s(1996) study, we can derive that the prices of import goodsare mainly decided by the demand of the importing country, exporters’ marginalproduction cost and exchange rate. When the exchange rate moves, out of the totalprofits and market share considerations, foreign exporters may adjust the cost-plusrate. That would impact the import prices in importing countries, but also caused the exchange rate pass-through incomplete. Transmission mechanism of exchange ratechanges on domestic commodity price is more complex and can be divided into directand indirect pipeline. Direct transmission mechanism refers to a country’s currencyappreciation would lead to lower prices of import goods, while the decline in prices ofimport goods will lower the price level of importing country. Indirect transmissionroute is that RMB exchange rate movements influence the domestic commodityprices through the mechanisms of production costs, alternative mechanisms, moneywage mechanism, money supply mechanism, debt mechanism and expectedmechanism.Based on the Research scholars from home and abroad, this paper constructedthe exchange rate pass-through model of import agricultural prices in china andempirically analyzed the impact of RMB exchange rate movements on agriculturalimport prices. In order to eliminate the impact of seasonal factor and heteroscedacity,variable series were seasonally adjusted and taken the logarithm. Then each of thevariables in the model were ADF tested. The conclusion is that the variables are firstdifference stationary. On this basis, we used Johansen Cointegration to getstandardized coefficients cointegration equations for analyzing long-term impact ofRMB appreciation on China’s agricultural import prices. The results indicated thatthere was a negative correlation between RMB exchange rate movements and theprices of agricultural products in the long-term. The RMB exchange rate pass-throughwas incomplete.Finally, we used vector error correction model, impulse responsefunction and variance decomposition method to analyze the dynamic impact ofChina’s RMB exchange rate changes on agricultural prices in the short-term. Theresults showed that: China’s import prices of agricultural products had adynamic self-adjustment mechanism from the short-term deviation to long-runequilibrium.This paper also built a exchange rate pass-through model of domesticagricultural prices in china. The empirical methods were similar with the model ofagricultural import prices. The results showed that: the exchange rate pass-through ofChina’s domestic agricultural prices was incomplete in the long-term and the exchange rate pass-through of agricultural import prices is greater. In the short term,domestic agricultural prices have dynamic self-adjustment mechanism fromshort-term fluctuations to the long-run equilibrium. Agricultural import prices had afaster adjustment speed.