Transmission Mechanism Of Monetary Policy, Capital Market Research

With its rapid development, capital market is playing a more and more important role in our economic life in China. Capital market has functions of resource allocation, property rights transaction, risk pricing and the corporate governance, has an increasing impact on monetary policy. The development of capital markets has also changed the transmission channels of monetary policy, the traditional interest rate channel and credit channel have weakened, while the capital markets channel become an important transmission channel. It has been 27 years since the central bank enforce monetary policy. The transmission mechanism attracts scholar's attentions, but researches on monetary transmission mechanism through capital market channel are not systematic. Based on Western classic theory, a research on monetary policy transmission mechanism through capital market channel in China is done in this paper. It also reviewed the development process of China's capital market and monetary policy enforcement, and an empirical research on the effectiveness of asset prices channel is done.Correlation test, OLS regression, ADF unit root test, Cointegration Test and Granger Causal Relation Test models are applied in analyzing the mechanism in China. On the basis of sample data from 1999 to 2010, this paper gives emphasis on examining the monetary policy transmission mechanism of capital market in China. The empirical research in this study covers two aspects:The transmission from monetary policy to capital markets by analyzing the effectiveness of the money supply, interest on asset prices; The transmission from capital markets to the targets of monetary policies by analyzing the effectiveness of asset price on consumption and investment by wealth effect and investment effect.The result shows that our monetary policy of capital market has not significantly. The empirical research indicates following results:First, Money supply M0,M1 and M2 fluctuation are highly correlated with the changes of asset prices in capital market. And there are long term balanced relationships among money supply and asset prices. Second, changes in interest rates are positive related to asset prices in short term. Third, assets prices in capital market do not have significant impacts on residual consumption and corporate investment. OLS regression equation shows that, residual consumptions mainly depends on disposable income, while corporate investment depends on the supply of bank loans.As a whole, Chinese capital market doesn't have significant influence in acting as a transmission mechanism of monetary policies in China. Based on these results, the paper puts forwards some proposals in policy-making, such as the capital market structure, scale, supervision and so on.