Stock Price Fluctuation And Monetary Policy

Over the past 30 years, price stability has been the most important objective of many countries' monetary policy. While inflation has been effectively under control in these countries, assets price represented by stock price is increasingly fluctuating. Whether the outbreak of Japan's stock crisis and real estate bubble in the early 1990s, or the Asian financial crisis of 1997, or the global financial and economic crisis triggered by the 2008 U.S. subprime mortgage crisis, the political and economic patterns of all relevant countries' are heavily impacted. In China, since the birth of its stock market, there has been a common phenomenon that stock price rises and slumps sharply in the past 20 years. In the context of assets securitization expansion, assets price has become a potential transmission channel of monetary policy. The Central Bank's monetary policy is facing serious challenges.With stock as the representative of assets, this paper uses the monetary policy transmission through the channel of stock price as the starting point to study the relationship between stock price fluctuation and monetary policy. Based on the research of scholars' both in China and abroad,I investigate the influence of the adjusting of monetary policy on stock price and the impact of the fluctuation of stock price on real economy. First, I construct this paper's theoretical framework through elaborating the causes of stock price fluctuation, the monetary policy transmission through stock price and the reaction of monetary policy in response to stock price fluctuation. By using some empirical research methods, such as stationarity test, Granger causality test and Johansen cointegration test, I found that there is a long term equilibrium relationship among our monetary policy, stock price and real economy, but the transmission effect lags behind and is weak. Taking the current situation of our monetary policy practice and stock market's development into consideration,I analyze the reasons that constrain the role of stock price as the transmission channel of monetary policy in depth.In the conclusion part, based on the preceding analysis, we point out that The Central Bank of China should pay attention to but should not solely focus on the stock price fluctuation. Then I put forward several suggestions to improve the relationship between our stock price fluctuation and monetary policy.