A Group of Criterions on National Economic Security with Pass-through Model

Abstract

The fluctuation of foreign exchange rate has a fatal influence on one country’s domestic economy, foreign trade, and the relations between international economies. In this paper, I prove the Pass-through Model of Tange(1997) and propose a group of criterions of national economic security including the international trade pass-through parameter and the domestic trade pass-through parameter. By doing empirical research of Thailand, Indonesia, Korea, Japan and UK, I conclude that when the international trade pass-through parameter is far from 1, the domestic exchange rate should be adjusted; when the domestic trade pass-through parameter is far from 0, the fluctuation of foreign exchange rate will lead to the crisis of the domestic economy. From the results of this paper, we can see that, the exchange rate of RMB is relatively reasonable, and it may have a little fluctuation in the future; on the other hand, the fluctuation of exchange rate has a certain extent of influence on China’s domestic market, but it can’t be large. Keywords-Exchange Rate; Pass-through Model; Financial Crisis; Historical Data