A Study On The Relation Between China's Monetary Policy And Asset Prices

Since the U.S. subprime mortgage crisis and the international financial crisis in 2008, the relationship between monetary policy and asset prices has been a hot topic in academic research and policy practice. China is still in the process of transition, has a multi-objective, multi-tool monetary policy framework, and its economic characteristics is also quite different from the developed countries. Therefore, the study on the relation of China's monetary policy and asset prices must take into account the differences. Both in theoretical research and policy implementation, non-intervention opinion is on the more support now. From the opinions of some China's central bank officials, China's central bank seems to have inclined to the non-intervention too.This dissertation studies the relation between China's monetary policy and asset prices on the basis of theoretical discussion, mainly with the ADL model and spectral regression model.The conclusions are as follows. First, wealth effects of China's stock price and real estate price are not significant in the overall, and change in real estate price influences real estate investment through financial accelerator mechanism. Second, real economy and stock price are in weak interaction, and real estate price and real economy are in closer relationship, more obvious two-way causal relationship between the two. Third, stock price change has a short term influence on the CPI, but long-term impact is small, while real estate price has long been influenced by CPI change, the need to preserve and increase wealth value on condition of inflation being the main working channel. Fourth, different monetary policy variables work on different prices with different ways. Money aggregate shock works on stock price fastest, on CPI slower, on real estate price slowest. Credit shock works on stock price also fastest, on real estate price slower, on CPI slowest. Interest rate shock doesn't works on three prices distinctly differently. The credit policy and the interest rate policy play their roles not only by changing money aggregate, but also through policy expectation channel. They influence asset prices and the CPI in a more direct way than money aggregate. Fifth, in the micro, positive feedback mechanism relates to asset bubble closely, and in the macro, due to the different speeds CPI and asset prices absorb policy shocks, macroeconomic stimulus policies, especially monetary policy could lead to formation of asset price bubble. Sixth, based on the empirical results, China's central bank reacted to asset price fluctuations, especially long-term fluctuations in a trend. Interest rate policy has a big impact on the real economy, but short-term impact on asset prices. Therefore, interest rate policy is not an effective tool to manage asset price fluctuation.Based on the above findings, the paper proposes a number of recommendations. First, macro-prudential policy and balance sheet tool can play a great role in achieving financial stability. Second, money aggregate can be used as indicators of different prices in different frequencies, and to maintain stable money aggregate growth can help to stabilize the overall price level. Third, to accelerate financial market reform is an important aspect of asset price fluctuation management. Fourth, to straighten out the monetary policy management system and form the effective supervision on financial management department is the long-term solution to the problem of asset price fluctuation.