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The Impact of RMB Exchange Rate Fluctuation on Price Level in China: An Empirical Analysis Based on the Vector Error Correction Model

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  • Songlijiang Pan

Abstract

With the improvement of RMB internationalization level, the impact of the changing international financial environment on China¡¯s economy is becoming more and more serious, so it is increasingly important to study the transfer effect of exchange rate changing on Chinese prices. Based on the monthly data from August 2005 to October 2016 and by constructing vector error correction model, this paper empirically examines the transfer effect of RMB exchange rate changes on China¡¯s price level. It is found that: 1) The transfer effect of nominal effective exchange rate of RMB on the single price index is smooth. 2) The transfer effect of RMB nominal effective exchange rate on China¡¯s price index is incomplete and there is a certain delay. For each unit of appreciation of RMB, the consumer price index will fall by 0.18 units. Import price index (IPI) respond most quickly to exchange rate movements, while producer price index (PPI) and consumer price index (CPI) slow down in turn. 3) The error correction model analysis shows that the nominal effective exchange rate of RMB has a certain self-correcting mechanism for the transfer effect of China¡¯s price index.

Suggested Citation

  • Songlijiang Pan, 2018. "The Impact of RMB Exchange Rate Fluctuation on Price Level in China: An Empirical Analysis Based on the Vector Error Correction Model," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(5), pages 184-196, May.
    • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:5:p:184-196
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    References listed on IDEAS

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    3. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 243, European Central Bank.
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    Cited by:

    1. Roberto Calero & Gabriel Rodríguez & Rodrigo Salcedo Cisneros, 2022. "Evolution of the Exchange Rate Pass-Throught into Prices in Peru: An Empirical Application Using TVP-VAR-SV Models," Documentos de Trabajo / Working Papers 2022-510, Departamento de Economía - Pontificia Universidad Católica del Perú.

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    More about this item

    Keywords

    exchange rate; pass-through mechanism; price level; vector error correction model;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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