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

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.

The Effect of Real Effective Exchange Rate Changes on China’s Import Trade Structure

“…REER in this model indicates a negative impact on RTIM, representing a one unit increase in REER results in 12,897 units decreases in RTIM. Coupled with 0.0514 unit increases in RTIM caused by one unit increase in RGDP, the model demonstrates plausible effects that are consistent to literature (Pan, 2018). The registration results of RSTIM show that one-period lag is positively related to current RSTIM as well.…”

The Effect of Fiscal Policy on Inflation Rate in Cambodia

“…The mixed of monetary and fiscal policy was implemented by Luyna and Ravin (2011) to investigate how inflation rate and real GDP response to the shock of money supply and government expenditure by adopting VAR model of five indicators including government purchase, monetary aggregate, exchange rate, price level, and gross domestic product. To analyze further, the short and long run relationship between consumer price index, exchange rate, money supply, and government expenditure, especially to measure the speed of adjustment how fast price level adjust back to equilibrium owning to fiscal and monetary policy shock, a Vector Error Correction Model (VECM) was employed by Siphat and Dash (2021). In the absence of monetary policy, the study of the effectiveness of fiscal policy on inflation rate has not yet been conducted in Cambodia, Thus, the main purpose of this research is to seek an answer to the research question, "Does fiscal expansionary cause general price level to increase in Cambodia?…”