Empirical Research On The Exchange Rate Pass-through Effect Of RMB To Domestic Price Level

Since China adopted the reform of the exchange rate regime in July 2005, the RMB appreciation continues to increase, as of the end of December 2014, the RMB Exchange Rate against the US dollar has appreciated more than 33.65%. In recent years, the steady appreciation of the RMB, but China’s trade surplus is not only not reduced, but continues to increase; Meanwhile, with the steady appreciation of the RMB China’s domestic prices are constantly rising. According to traditional economic theory of exchange rate, The appreciation of the RMB, will lead to China’s import commodity prices decline, And then through the direct and indirect transmission mechanism to reduce China’s domestic price level. But the reality of our country’s domestic prices did not fall, but is constantly rising. This phenomenon is clearly contrary to the traditional theory of purchasing power parity. In this context, research on these issues such as Pass-through effect of exchange rate fluctuations on prices, Whether the RMB exchange rate pass-through will affect the implementation of domestic monetary policy, and the need to control rising prices by regulating the level of the exchange rate has great theoretical and practical significance.On the basis of previous academic studies, the paper research the exchange rate pass-through of the RMB to the domestic price level by empirical analysis. Firstly, the paper use January 2000 to December 2014 monthly data, and apply copula model to study the dynamic relationship between exchange rate and domestic prices. The results show that there are different degrees of relationship between the RMB exchange rate with import prices, producer prices and consumer prices. Then use the VAR model to calculate pass-through effect of the RMB exchange rate against the import prices, producer prices and consumer prices, as the same time, use the co-integration test to estimate the long-term impact of the RMB exchange rate on domestic prices, Finally, the paper analyzes the extent and speed of the RMB exchange rate pass-through to the domestic price chain by using the impulse response function and variance decomposition. The results of impulse response and variance decomposition show that:(1) The pass-through of RMB exchange rate on the domestic price is incomplete and there is a certain time lag. If the nominal effective exchange rate rose by 1%, import prices after 10 months and the producer prices and consumer prices after 18 months fell 0.48,0.35 and 0.12 percentage points respectively.(2) On average, the exchange rate impact on the interpretation of domestic price changes is weak. Specifically,, the impact of the exchange rate can reduce the import price, producer price and consumer price forecast error of 7%,3.8% and 3.4%.From the above empirical results, the following conclusions can be drawn:(1)RMB nominal effective exchange rate and the domestic price level has a long-term and stable negative correlation, that is, the appreciation of the RMB exchange rate can bring about the reduction of the price level.(2) The pass-through effect of the RMB nominal effective exchange rate on domestic prices is very little, appreciation of the RMB is not an effective method to control inflation. In addition, in the inspection also found that the impact of money supply, industrial added value on the domestic price is also very limited.(3) The impulse response of different prices on the impact of exchange rate is different, exchange rate changes on import prices have a more significant negative effects, the impact of exchange rate for the domestic producer price and the consumer price is relatively much smaller.Finally, according to the empirical conclusion and the economic phenomenon of our country, propose to improve the RMB exchange rate formation mechanism, accelerate the pace of internationalization of the RMB, foreign exchange reserves and improve the export oriented economy and other related policy recommendations.The novelty of this paper is the third chapter reference linkage methodology between the financial and capital markets, using the Copula-GARCH model empirical analysis the dynamic relationship between the RMB exchange rate fluctuations with price of imports, producer price and consumer price. On the basis of the impulse response function, this paper calculates the exchange rate pass-rate, which is used to analyze the transfer level of the RMB exchange rate on the domestic price. Of course, there are some shortcomings in this paper. Mainly in the process of empirical analysis, because some data of the variables is difficult to obtain, I can only use other variables to replace or use other methods to calculate the results. To some extent, it will affect the accuracy of the final results of the model.