Influence of Trade Openness and RMB Exchange Rate Volatility on Inflation in China

Abstract

As global economic integration continues to develop, China's exchange rate marketization reform process is also accelerating, and the impact of exchange rates on China's economic development has become more and more important. At the same time, China has increased foreign trade cooperation. The degree of China's trade openness is also deepening. The aim of this thesis is to investigate the influence of trade openness and exchange rate volatility on inflation in China. Through employing the Autoregressive Distributed Lag (ARDL) model, we will explore the relationship between selected macroeconomic variables in a single-equation time series setup and estimate both long-term and short-term effects on China’s inflation with the help of the commonly used econometric tool EViews10. My result shows that in the long-run there is a significantly positive relationship between trade openness and inflation, and there is no clear evidence of a significant effect of exchange rate change to influence inflation. In short run, there is a significantly negative relationship between trade openness and inflation and no relationship between exchange rate change and inflation. It should be clear that our model and conclusions are based on a specific period (2000-2018) in China.