Could Rmb Appreciation Hold Down Inflation?

Thesis Title: Could RMB appreciation hold down inflation?

ZHAO Yang, ZHOU Huilin, MEI Xiaoyi,

FENG Jialei

School of Finance

Zhejiang Gongshang University

Twilight244652858@yahoo.cn

【Abstract】 This paper centers on analyzing the reasons theoretically why RMB appreciation could not hold down inflation and taking Japan’s situation from 1985 to 1995 as a example. The results show that the price pass-through effect of RMB exchange rate fluctuations on domestic inflation measured by CPI is low and the inflation should be inspected from demand drive, cost to promote and money supply.

【Key words】 exchange pass-through effect ,demand, money supply

1 Introduction

Since Geithner, the U.S. treasury secretary, had presented the view that China was controlling the exchange rates, scholars represented by Bergsten and Krugman quickly supported it. Bergsten, working in the U.S. Peterson Institution for International Economics, thought RMB was underestimated by 25% compared to trade-weighted basic RMB, and by 40% relative to dollars. Moreover, IMF also thought RMB was underestimated. All these reasons increase in external pressure. At the start of March, 2010, 130 congressmen of U.S. insisted that Treasury Department censure China for controlling exchange rates in the report about different nations’ exchange rates issued in the middle of April. In the senate, Schumer bill producer which was modified restarted. If RMB couldn’t appreciate sharply, this bill requested that Obama impose high penalty duties to all the goods from China.

At the same time, because of excess liquidity, over-investment and rapid expansion of credit, from 2007, domestic prices continued to increase; the inflation measured by CPI reached the peak during 10 years. From March, 2007 to December, 2008, CPI continuously exceeded 3% compared to normal level during 22 months and reached the highest level of 8.7% in February, 2008.

RMB appreciation pressure from all over the world,...