Dissertation > Economic > Fiscal, monetary > Currency > China's currency > Principle of policy and its elaborate

The Research of Asset Prices Fluctuation on the Impact of China’s Monetary Policy Effects

Author WangXin
Tutor ZhuFang
School Jinan University
Course Finance
Keywords Asset Prices Fluctuation Monetary Policy The ultimate goal Inflation
CLC F822.0
Type Master's thesis
Year 2013
Downloads 22
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For a long time, the primary goal of the monetary policy is to maintain price stability. Butby the U.S. subprime mortgage crisis triggered the global financial crisis, the world economy hadsuffered a great impact. The essence of this crisis is financial institutions credit crisis, caused bythe burst of price bubbles. This not only resulted in large fluctuations in prices, but also hadimmeasurable negative impact on the real economy. Thus, whether monetary policy should focuson asset price volatility is becoming a hot spot of theoretical debate.This paper firstly based on studying domestic and foreign relevant theory, and thensystematically analyze the inner relationship between asset prices and monetary policy. In thecase of combined with Chinese actual conditions, this paper adopt the method of combiningqualitative and quantitative analysis, discuss the impact of assets price on inflation and output,and then explore the effect which our country assets price fluctuation on monetary policy. Onthis basis, within the bound of estimated IS-Phillips model of China, this paper resolves theproblem of minimizing the central bank’s loss and then deduces Chinese monetary policyreaction function including the monetary policy reaction function which taking asset prices intoconsideration and without taking asset prices into consideration. Through normative analysis, wecan get the conclusion that asset prices play an important intermediary role in monetary policytransmission mechanism and change the relative stability of the money supply and affect theeffectiveness of monetary policy. Through empirical research analysis, we can find that assetprice volatility will affect the effects of monetary policy in China, namely the asset pricevolatility will have profoundly impact on inflation and output in our country. The influence ofthe real estate market price fluctuations is greater than the influence of the stock market pricevolatility. The monetary authorities should focus on asset price fluctuations, and should givepositive response when asset prices fluctuate significantly. This is because the magnitude ofresponse of monetary policy on inflation and output will be let down and the fluctuation ofinflation and output will be reduced when central bank takes asset prices into consideration.Therefore, this article suggested that the central bank should not only commit to achievingprice stability target, but also focus on the influence of asset price fluctuations on the realeconomy. The second is that the real estate price fluctuation should be given greater concern bymonetary authorities. The third is to improve the monetary policy transmission pathways and thelast point is that central bank should strengthen the supervision on asset markets.

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