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Fluctuations in asset prices, monetary policy control strategy research

Author: WangPeiKang
Tutor: ChenYongMing
School: CPC Shanghai Municipal Party
Course: National Economics
Keywords: asset price inflation monetary policy financial security
CLC: F822.0;F293.3
Type: Master's thesis
Year: 2010
Downloads: 82
Quote: 0
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Abstract


Since the 1980s, inflation has been effectively controlled. But asset price volatility has become a threat to employment and output in a stable macroeconomic environment. Confronting with the fluctuations of asset price, the central bank, whose objective is to maintain price stability , is at a loss---- interfere or not? This thesis considers that maintaining financial stability is an important responsibility of the central bank. When the asset price volatility threats the financial security, the central bank should regulate and control the asset price volatility and take measures to prevent economy from the bubble burst.Referring to the central bank’s regulation strategy, the thesis believes that we must modify the existing monetary policy framework in order to effectively control asset price volatility. We should take financial stability as an independent monetary policy objective and take discretionary approaches to control possible fluctuations in asset price with selective monetary policy tools. With these measures, we could prevent the economy from asset price volatility and reduce the damage to other sectors.For the theoretical basis of central bank’s intervention to asset price, this thesis argues two points: firstly, frequent fluctuation in asset price affects the macroeconomic stability and damage social welfare, thus it needs direct central bank intervention; secondly, with taking the capital markets and asset price involved into the "Fisher equation", this paper has studied the relationships among asset price, inflation and monetary policy. Analysis shows that it exists 27 kinds of possible changes of the relationship. The complex relationships indicates just focusing on inflation can’t create a stable macroeconomic environment, the central bank must intervene in asset price inflation.China is facing a serious problem of asset price inflation, the thesis could help the studies on China’s monetary policy operations. The central bank should set up risk warning mechanism of financial system as to monitor the influence of asset price fluctuations on financial stability, regulate the liquidity and stop the credit funds’illegal flowing into the stock market and real estate market.

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CLC: > Economic > Economic planning and management > Urban and municipal economy > Urban Economics and Management > The real estate economy
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