Dynamic Impact Of RMB Exchange Rate Fluctuation On CPI

As a symbol of currency's external value,exchange rate fluctuations will have various effects on domestic prices.According to economic theory,when a country's currency appreciates,its domestic price level should fall.Since the exchange rate system reform in July 2005,the RMB exchange rate and domestic prices have increased in the same direction.In this context,this article explores and analyzes the dynamic impact of RMB exchange rate fluctuations on CPI.This article uses a combination of theory and empirical methods to first analyze the direct and indirect transmission mechanism of exchange rate to CPI.Secondly,from the two perspectives of complete exchange rate and incomplete transfer,the law of one price,PPP theory and PTM theory are sorted out,and the process of continuous development of exchange rate transfer theory is explained.Thirdly,this paper analyzes the quantitative and qualitative analysis of the RMB exchange rate and the development history of the CPI index,and analyzes the reasons for the fluctuations at different historical points in time and the impact of the fluctuations on the domestic economy.The dynamic impact of the index provides the necessary prerequisites.Finally,in the empirical research,this paper selects the monthly data of China's CPI,nominal effective exchange rate of RMB(NEER)and money supply(M1)from January 2006 to July 2019,through vector autoregressive model(VAR)and The time-varying parameter vector autoregressive model(TVP-VAR)comprehensively investigates the impulse response between variables and method decomposition contribution rate,and finally draws empirical research conclusions.The research results of this paper have the following three aspects: First,the impact of RMB exchange rate on CPI is more significant in the long run,and it is almost the same as the cumulative contribution of money supply to CPI;Second,the appreciation of the RMB exchange rate will have a negative effect on the CPI,but the negative effect has a time lag of about 4 months,and this paper further concludes that the impact of the RMB exchange rate change on the CPI response is slower than the money supply impact;Third,during the period of stable CPI growth,CPI is least affected by three variables.The impact of M1 on CPI is most significant during the period of CPI slowdown,and the impact of NEER index on CPI is most significant during the period of rapid CPI growth.Based on this research,the following three revelations are obtained: First,the impact of exchange rate fluctuations on CPI cannot be ignored in the long run,so attention should be paid to the impact of exchange rates on domestic prices.Therefore,improving the foreign exchange market and enhancing the flexibility of the RMB exchange rate system are necessary;Second,because the exchange rate as a price adjustment tool is very limited in time,it is necessary to correctly understand the causes of price instability,strengthen the exchange between the exchange rate system and monetary policy,and adopt targeted programs to deal with inflation;Third,in the course of economic development,major political events will have an impact on domestic prices.Therefore,we should pay attention to major economic sudden events and seize the opportunity for economic development.