Analysis On The Effect Of RMB Exchange Rate Volatility On Inflation In China

In an open economy,the changes of exchange rate will lead to a change in inflation in theory.The effect of exchange rate changes on domestic price levels have always been a very important research topic in the field of international economics.In the traditional analytical framework of international economics,economists believe that the transmission of the fluctuation of exchange rate to prices is complete.But later scholars have proved that the exchange rate pass-through is incomplete and has time lag through a lot of theoretical research and empirical analysis.First of all,the existing domestic and foreign researches have been sorted out and explored.Based on the previous research results,the methods and ideas of this thesis are clearer.Considerable amount of foreign research literature on the impact of exchange rate fluctuation on a country's inflation are available.However,for the fixed exchange rate system has been implemented in China in the past,there are few studies on this topic in China.Since the reform of the RMB exchange rate in 2005,the fluctuation of the exchange rate has gradually increased.The impact of RMB exchange rate fluctuation on the domestic inflation level is getting stronger and stronger,and scholars' researches on the topic are gradually increasing.The researches were generally support that the exchange rate pass-through effect is both incomplete and time delayed.Secondly,it explains the theoretical framework,expounds the theory of exchange rate pass-through effect and the incomplete of exchange rate pass-through effect as well as the transmission mechanism of exchange rate fluctuation to the changes on CPI.Next,by empirical study,it is concluded that there is a long-term stable equilibrium relationship between the nominal effective exchange rate of RMB and CPI under the condition of integrated of order one.NEER and CPI are mutually causality.Based on quarterly data from 2000 to 2017,using Stata Software to establish a Rolling regression Model to investigate the dynamic process of the transfer coefficient of RMB Exchange rate to CPI in China.The results of dynamic elastic coefficient show that the NEER of RMB is negatively correlated with the inflation rate,and the degree of influence is tiny.The coefficient first showed a downward trend,reaching the lowest point in the second quarter of 2014,and then the elastic coefficient fluctuated around 0.01.The empirical results show that although the nominal effective exchange rate of RMB and the inflation rate have passed the significance test and presented a negative correlation,the degree of influence is very weak and even negligible.Finally,based on the empirical results to make a reasonable explanation and put forward several suggestions,that is,from the perspective of inflation control,exchange rate has very little impact on domestic inflation,so the appreciation of RMB cannot play a role in restraining inflation.Therefore,we should not rely on the adjustment of exchange rate to achieve the purpose of inflation control,we should consider other effective policy measures to control inflation.In short,in order to further advance the process of RMB internationalization,we should steadily promote the reform of the RMB exchange rate regime.At the same time,China should fully consider the cross-influence of various macroeconomic factors and reasonably match all kinds of policy measures,in order to better keep inflation within a reasonable range.