Pass-Through Effect of Rmb Exchange Rate on China’s Inflation

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Pass-Through Effect of RMB Exchange Rate on China’s Inflation

Chapter 2 Literature review 3
2.1 Introduction 3
2.2 Exchange rate pass-through effect 3
2.2.1 Narrowly defined exchange rate pass-through effect 3
2.2.2 Broadly defined exchange rate pass-through effect 4
2.2.3 Complete and incomplete exchange rate pass-through 5
2.3 Relevant theories of exchange rate pass-through 7
2.3.1 Theory of complete exchange rate pass-through 7
2.3.2 Theory of incomplete pass-through 9
2.4 Empirical research on exchange rate pass-through 13
2.5 Summary and reflection 16
Reference 19

Chapter 2 Literature review

2.1 Introduction

This chapter reviews the theoretical and empirical researches on exchange rate pass-through effect. Specifically, this chapter firstly introduces the definition of exchange rate pass-through effect, incomplete and complete exchange rate pass-through. Then, this chapter analyses the theory of exchange rate pass-through effect, with focus on the reasons for the common incomplete exchange rate pass-through effect. After theoretical analysis, this chapter reviews and analyses the empirical research on exchange rate pass-through effect. A major part in this section is the review of the perspective and method for analysing exchange rate pass-through effect. Empirical researches generally referred to McCarthy (2000)’s research method, used VAR model, and selected specific area and time window data to empirically analyse exchange rate pass-through via price. At last, based on theoretical and empirical research as well as existing researches on RMB exchange rate pass-through effect, this chapter analyses the limitations of existing researches and poses the research questions.

2.2 Exchange rate pass-through effect

Exchange rate pass-through effect can be defined as the magnitude of the impact of a country’s nominal…...

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