An Empirical Study of Exchange Rate Pass-Through in China

Xiaowen Jin ()

Panoeconomicus, 2012, vol. 59, issue 2, 135-156

Abstract: 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. Key words: Pass-through, Exchange rate, Consumer price, Producer price, Monetary policy.JEL: E31, E42, F31, F41.

Keywords: Pass-through; Exchange rate; Consumer price; Producer price; Monetary policy (search for similar items in EconPapers)
Date: 2012
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