Exchange rates and prices: Evidence from China

This article develops a pricing model that incorporates an industrial organization approach with the traditional quantity theory of money to explain the impact of exchange rates on consumer prices. Using time-series data on prices and exchange rates of China, the model replicates the main features of the observed facts: exchange rates influence consumer prices through changing import prices; money supply and output influence consumer prices following the quantity theory. The estimating results show that exchange-rate pass-through to consumer prices is low and increases from the short run to the long run. The extent of pass-through is likely to depend on markup adjustment and marginal costs.