The Impact of RMB Exchange Rate Pass-through on The Domestic Price

Abstract

Traditional international economic theory suggests that the exchange rate fluctuations will be reflected, while to the same extent, on price levels. However, more and more facts indicate that the exchange rate pass-through to one country’s price level is usually incomplete. Since the new round exchange rate policy reform dating from July 2005, the fluctuations of exchange rate between RMB/USD become more and more frequent, while the volatility also increases. How would the change of exchange rate put an impact on import and export enterprises’ product pricing and domestic overall price level, and hence influence the structure of domestic production and investment and the economic policies government. These question all deserve an in-depth analysis. Moreover, renminbi’s exchange rate pass-through effect has a significant meaning to the development of new monetary policy. In this paper, we calculate the numerical value of renminbi’s ERPT(exchange rate pass-through), based on Vector Autoregression Model, in the purpose of revealing the shocks to domestic price level from fluctuations of exchange rate. On this basis, with the micro-level explaination to RMB’s incomplete pass-through, we analyze the significance of a stable ERPT for the control of inflation environment and implementation of the relevant economic policies. The main conclusion is that exchange rate pass-through for China’s import prices, production price and consumer prices are incomplete, while the transmission effect has a lower order.