The Pattern of Exchange Rate Effects on Chinese Prices, 1980–2002

Xuxin Yu

Review of International Economics, 2007, vol. 15, issue 4, 683-699

Abstract: This study sheds light on the current debate on the effect of the urged appreciation of the Chinese yuan by examining the linkage between currency‐value changes and domestic producer prices, using annual data from 14 broad industry sectors in China for the years 1980–2002. A structural break analysis implies that only in the past decade, when price liberalization was essentially achieved and the deepening of state‐owned enterprise reform was in place, has an economic system in which prices respond to exchange rate fluctuations via the expected market mechanism been set up in China. Incomplete exchange rate passthrough to domestic prices is estimated and is found to vary across industries and over time. The variations are suggested to be explained by a set of variables that characterize market competitiveness, infrastructure development, and the increasing proportion of nonstate‐owned enterprises in the economy.

Date: 2007
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