Choice Of Assets, Real Estate Price Volatility And Financial Stability

Since 1980s, inflation has been effectively controlled. However, asset prices of various countries fluctuate severely. It becomes a new challenge for monetary policy of central banks. In the cycle of expansion and collapse of asste prices bubble, frequent financial crisis leads to instability of macro economy. The fluctuation of asset prices and its financial risks have become the main "enemy"of central banks. It is found that the violent fluctuation of asset prices will lead to economy bubbling and hidden financial risks. Meanwhile, the burst of asset prices bubble will impact macro economy more fierce than inflation. Central banks of various countries have realized the effect of asset prices on monetary policy. In recent years, the relationship between asset prices fluctuation and monetary policy have aroused extensive attention of central banks of various countries. Under this background, more and more scholars begin to study the relationship between asset prices, financial stability and monetary policy.The dissertation holds that, in the situation of monetary economy, financial crisis comes from bank system crisis. The main reason of bank crisis is the excess of loan launch and the deterioration of credit assets quality which are caused by households' assets selection. Houholds' assets selection which aims at the maximization of wealth causes frequent inflation and collapse of assets prices and leads to financial fluctuation and thus the fluctuation of macro economy.Among kinds of assets selected by households, real estate is different from other assets such as stock because real estate is both consumer goods and investment goods. When selecting asstes, households can obtain bank's loan support by buying real estate. Therefore, the investment of real estate is directly related to the demand and supply of bank's credit. Households' asset selection depends on people's expectation. When the expected price of real estate rises, households will buy lots of assets of real estate which will cause the inflation of real estate price and the expansion of bank credit. This will, through positive feedback mechanism, form real estate bubble. Once encountering exterior impulsion, real estate bubble will burst and cause financial crisis. Therefore, the expectation of asset prices decides households' assets selection and the households' assets selection is the micro foundation of asset prices bubble and instability of financial system and macro economy.Therefore, the dissertation holds that the monetary policy should pay attention to the fluctuatuion of asset prices, especially the fluctuation of real estate prices. Since the violent fluctuation of asset prices will lead to severe fluctuation of financial system and macro economy, central banks should adopt forward-looking monetary policy. In addition, Since single monetary policy has time lag when reglating the inflation of asset prices, central banks should take some other macro financial policy as assist measures and correctly direct and control households' asset selection. This can effectively avoid the asset prices bubble, guard against financial risks and ensure the steady operation of macro economy.