An empirical study of exchange rate pass-through in China

In: Panoeconomicus: naučno-stručni časopis Saveza Ekonomista Vojvodine ; scientific-professional journal of Economists' Association of Vojvodina, Volume 59, Issue 2, p. 135-156

Open Access

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.