Exchange rate pass-through to domestic prices: An empirical study on China

This dissertation examines the linkage between currency-value fluctuations and domestic producer prices and its determinants by using annual data from 14 broad industry sectors in China for the years 1980--2002. Incomplete exchange rate pass-through to domestic prices is estimated and is found to vary across industries and over time. The variation of pass-through elasticity across industries is explained by a set of variables that characterize market competitiveness, while the change of the pass-through elasticity over time is interpreted by infrastructure development and the increasing proportion of non-state-owned enterprises in the economy. Moreover, the effects of price liberalization and state-owned enterprises reform on pass-through are examined. Recently, the U.S. government is urging the Chinese government to let the Chinese Yuan appreciate in order to eliminate the large trade deficit with China, while the Chinese government worries that the appreciation of Chinese Yuan would introduce too much international pressure on its domestic market. This study sheds light on this issue for the governments and private firms.