Impact of exchange rate changes on inflation : case of China

Abstract

The purpose of this paper is to analysis the effect of Chinese exchange rate changes to domestic inflation by using the VAR model. Choosing the nominal effective exchange rate and consumer price index from July 2005 to June 2013 as the sample interval, we estimate the VAR model between the two variables and analyse the data. The results of the effect of exchange rate pass-through to inflation show that there is a negative relationship between the nominal effective exchange rate and consumer price index, and the pass-through ratio has a hysteretic nature. The appreciation of the RMB has the ability to curb inflation in China, but the effect is limited.