Research On The Effects Of China Monetary Policy On Equity Market

Following the expansion of equity market' status and influence in the national economy day and day, the discussion about the relationship between monetary policy and equity market gradually becomes a focal point in the theoretical fields. The study on their relationship must explain three relative questions at least. It goes as following: The first is whether monetary policy should respond to developments in equity market. The second is the role and influence of equity market in the transmission mechanism of monetary policy. The third is how the monetary policy influences equity market and extension of the influence does. At present, most literature focuses on the first two questions. On the contrary, the study on the last question, which is more fundamental, is not profound enough. In fact, the study on the last question is related to the ability of the monetary policymakers to intervene the equity market and this is the foundation of the explanation to the first two questions.As a result, it is very important, especially for the policymakers—central banks and the investors of equity market, to understand whether the monetary policy has the ability to influence equity market and how it does.The main purpose of this paper aims to analyze the effects of China monetary policy on equity market from theory and practice by using the modern standard analyzing and empirical analyzing and try to answer whether the policymakers have the ability to regulate equity market effectively. Besides introduction, the main body of the paper contains four parts.In view of the fact that the theory and literature are the foundation of our analyze, so at first we have made a summarization and evaluation on the relative theory and practice study as detailed as possible in order to make a theoretical and practical foundation for the investigation in China.According to the general economic principle, the change of monetary policy will affect stock market by some certain transmission mechanism. That is to say people believe the stock price has a negative relation to monetary supply and positive relationto interest rate. But this theory is built on a series of hypothesizes, and the actual economic practice are more complicated than these hypothesizes and even disagree with them. So at the second part, we analyze the mechanism of two variables including money supply and interest rate that stand for monetary policy on equity market in theoretical way. Through the three-section theoretical model derived from traditional monetary quantity theory, as well as some actual investigation in the theories' hypothesizes, we extends the knowledge about the affluence of monetary policy on equity market, and makes the conclusion that the respond of equity prices to policy actions inclined to become complicated and we must take the concrete circumstances into account in the actual investigation, then can we get the right answer.On the base of the theoretical analyze, we carries on the empirical research on the effects of China monetary policy on equity market by using modern quantitative methods such as cointegration test, Granger cause test, VAR model, impulse response and variance decomposition, etc. This part is the core of this paper. The main results of our empirical study go as the following. First, money supply has a temporary impact on equity market. Second, the relationship between interest rate and stock price is steady in long run and out of equilibrium in short run. Third, constrictive monetary' effect is better than loose monetary'. Forth, no matter money supply or interest rate, their influence on equity market is very low, compared to equity market' change. In conclusion, monetary policy can influence equity market in some degree, but it hasn't the ability to regulate stock market.At the last part of this paper, we make a summarization and propose some pointed policy suggestions based on the conclusion. First, Central Bank should pay attention to instead of focusing on stock price. Second, transfer the regulate method of monetary policy. Third, the market-oriented pace of interest rate should be accelerated. Fourth, we should build a uniform, elastic and effective monetary market to promote the coordinated development in monetary market and equity market. Fifth, strength the cooperation of the supervisory departments, and improve the monetary policy' effectiveness. Finally, we should improve the stock market and put it into standard, tamp the micro foundation of the stock market, and resolve the problem of stock complete circulation energetically and safely.