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The Reaction of Monetary Policy on Asset Prices

Author: WangJun
Tutor: LuoJun
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Asset prices Financial stability Monetary policy Taylor’s rule
CLC: F822.0
Type: Master's thesis
Year: 2013
Downloads: 36
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Abstract


In the past30years, the world’s major developed and emerging market countries experienced sharp fluctuations in asset prices. In Japan’s stock market and real estate bubble in the1980s, the Southeast Asian financial crisis in the1990s, the U.S. Internet stock bubble burst in the early2000s, and the Global Financial Crisis since2007, assets price all play an important role. The past the decades major worldwide crisis, as well as the actual development of China’s economic, illustrates a fact:price stability does not guarantee the stability of the financial and economic development. In the background that the impact of asset prices on the on the achievement of the goals of traditional monetary policy has become prominent, it is necessary for more in-depth study of monetary policy’s reaction to asset prices. To analysis China’s central bank how to better respond to asset price volatility and maintain financial stability.This article focused on a range of issues in monetary policy respond to asset price process, that if it necessary, whether or not and how monetary policy react to asset prices. Discover the deficiencies of the current monetary policy in China, give some policy recommendations, and answer the monetary policy how to better react to asset prices. It needs to be pointed out that, the perspective of the article is the financial stability, and it throughout every part of the article.The paper is divided into six parts. The first part is the general introduction to the article, include the proposing of the research ideas, the main content, the main method and the innovations. The second part is related to the concept and literature review, in this part the important concepts is defined. The third part describes the major mechanism which asset prices volatility affect the financial stability. The fourth part detailed review the1996-2012monetary policy practice. The fifth part use extended Taylor rule to analyze the1996-2012monetary policy practice In the sixth part, basic conclusions are given.The main conclusions of this paper include:First, the challenges of asset prices on monetary policy in China is that asset price fluctuations will affect the behavior of the financial institutions in our country as well as the stability of the entire financial system, and thus indirectly influence the effect of the monetary policy. Second, China’s monetary policy is very different between the real estate prices and stock prices. On the stock market, the central bank only concerned about it. But on the real estate market, the central bank is not only concerned about it, but also take various measures to intervene it, directly or indirectly. Third, extended Taylor rule model passed cointegration test. So, the price of the asset as a decision-making reference variable enables the central bank to make a more rational decision-making. Thus, central banks need to raise concern on asset prices, strengthen the discovery and use of information implied by the asset price volatility.The innovation of this paper is:First, choosing financial stability as the perspective to observe monetary policy’s reaction to asset prices, so as to get rid of the unnecessary over-emphasized of asset prices and monetary policy, as well as the deviation that may result in conclusions. Second, most of the previous studies only conduct empirical consideration in the question, this paper first detailed review of the central bank’s monetary policy since1996, then use extended Taylor rule model to conduct empirical test. Third, the empirical section, using extended Taylor rule, study if it is necessary to take asset prices as China’s monetary policy decision-making reference variable.

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CLC: > Economic > Fiscal, monetary > Currency > China's currency > Principle of policy and its elaborate
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