Research On The Relation Between The Monetary Policy And The Price Of The Financial Asset

The relevance of stock price volatility and monetary policy issues is one of the forefront topics to study monetary policy. This is mainly because the world's central banks generally will view the as primary monetary objective policy to achieve at present. In general, a stable price level is helpful to economic stability and growth. However, price stability does not guarantee financial system stability. For example, asset price inflation appears in the late 1920s of the United States and in 1980s of Japan, both of which just appear in the price relatively stable environment. Does it mean success or failure monetary policy in these cases? These phenomena triggered a research whether the central bank can view the asset prices as a monetary policy. From the 1990s, foreign scholars have increasingly shifting their attention to the rapid development of the stock market, using time series methods to study the relationship of the price of and monetary policy.China's stock market lags far behind the developed countries in the world, but the size of the stock market has developed rapidly in the past 20 years. Especially after the tradable share reform, the Chinese stock market has entered vigorous development periods, and it is taking diversion of bank funds and accelerates the pace of the direct financing function. As of the end of 2009, China's total stock market capitalization accounted for 40.37 percent of GDP, and circulation market value accounted for 15.04%. With the constantly expanding stock market, it can efficiently allocate of resources and labor and affect the economy deeper. The research on these issues such as whether the relationship between the stock market and monetary policy is getting closer and closer and the central bank should look asset prices as a control objective, is becoming theoretical and practical significance to the central bank and investors.Based on the existed theoretical analysis and research, this paper analyses the relationships of the money supply and stock prices, explore the Japan and American empirics and does empirical analysis in different levels. Especially, this paper further studies the relationships between M1/M2 and stock price volatility of different industry. In the empirical research ,this paper have used some time series cutting-edge methods, such as unit root test, co integration tests, Granger causality test, impulse response and variance decomposition . Based on the datas from 1996.12 to 2009.05, this paper draws the following conclusion: there exists interactions relationship between the increment of the money supply, especially, the increment of M2 and stock price. So the increment of M2 can be used to predict the changes of stock prices which have a great reference value to the monetary authorities and investors. Money supply is due to side position between the money supply and stock prices. The monetary policy can affect the stock price in some extent, but this does not mean that the central bank can target asset prices as a control.