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An Empirical Study of Exchange Rate Pass-Through in China

  • Xiaowen Jin

    ()

    (Munich Graduate School of Economics, Ludwig Maximilians University Munich, Germany)

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    This paper seeks to estimate exchange rate pass-through in China and investigate its relationship with monetary policy. Linear and VAR models are applied to analyze robustness. The linear model shows that, over the long run, a 1% appreciation of NEER causes a decline in the CPI inflation rate of 0.132% and PPI inflation rate of 0.495%. The VAR model supports the results of the linear model, suggesting a fairly low CPI pass-through and relatively higher PPI pass-through. Furthermore, this paper finds that, with the fixed exchange rate regime, CPI pass-through remains higher. The exchange rate regimes influence on CPI pass through, combined with the fact that appreciation diminishes inflation, suggests that the Chinese government could pursue a more flexible exchange rate policy. In addition, reasons for low exchange rate pass-through for CPI are analyzed. The analysis considers price control, basket and weight of Chinese price indices, distribution cost, and imported and non-tradable share of inputs.

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    Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

    Volume (Year): 59 (2012)
    Issue (Month): 2 (May)
    Pages: 135-156

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    Handle: RePEc:voj:journl:v:59:y:2012:i:2:p:135-156
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    1. Reuven Glick & Michael Hutchison, 2008. "Navigating the trilemma: capital flows and monetary policy in China," Working Paper Series 2008-32, Federal Reserve Bank of San Francisco.
    2. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," Working Papers Central Bank of Chile 409, Central Bank of Chile.
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    16. Ca' Zorzi, Michele & Hahn, Elke & Sánchez, Marcelo, 2007. "Exchange rate pass-through in emerging markets," Working Paper Series 0739, European Central Bank.
    17. Coricelli, Fabrizio & Jazbec, Bostjan & Masten, Igor, 2006. "Exchange rate pass-through in EMU acceding countries: Empirical analysis and policy implications," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1375-1391, May.
    18. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 0243, European Central Bank.
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