Asset Prices Fluctuation And Microeconomic Stability

In this paper, we follow the analysis framework of Keynesian and think that changes in consumptions investments and net exports can cause the fluctuation of national income, but we also proposes new contents in this framework : we extend the causes of national income fluctuation from real economic areas to financial markets, we study the stability of macroeconomic by examine the effects of the asset prices volatility on the real economic activity and financial system; and also ,we include financial system stability into the concept of stability of macroeconomic except for real economic.According above thoughts, the whole paper divided into five parts and consists of nine chapters:Section 1, including chapter 1 and chapter 2, is the openness of this paper. Chapter 1 is the introduction of this paper, it raise the main questions that will be study in this paper, and summarize the outline, the analysis methods and concepts used in the paper, and still sum up the possible theory innovation in this paper at the same time. Chapter 2 is about the determination and the volatility of asset prices. In this chapter, we divide the asset prices into stock price, property price and exchange rate, and analyse them respectively. Section 1 lay a foundation for the following analysis of this paper.Section 2, including chapter 3,4 and 5, analyse the transmission channels through which asset prices-affect real economic activity. Asset prices mainly through affect the components of the national income such as consumption, investment and the net export to impact the real economy. First, in chapter 3 , we study the effect of asset prices changes on consumption , which is what we called "wealth effect" channel; Second , in chapter 4, we analyse the influence of asset prices fluctuates on investment. Our focal point concentrates on the influence that the stock price changes on firms invests; At last, in chapter 5, we examine the effect of another kind of asset price- exchange rate that affects economic activity mainly through the import and export trade channel-on the macroeconomic.Section 3, from chapter 6 to chapter 7, study the relationship between asset prices fluctuation and financial system stability. Chapter 6 analyse the impact of asset prices fluctuates on banking system stability. Evidence from past financial crises shows that in a number of instances large asset price cycles have preceded severe banking problems for both industrial and emerging countries. Asset prices fluctuation main through channels such as credit risk, market risk , reduction in profitability risk , re-capitalisation of subsidiaries risk and "second round "effects risk to affect the stability of banking system . Chapter 7 investigate the relationship between the exchange rate and financial fragility. We distinguish three views of this relationship: "The moral hazard hypothesis", "The original sin hypothesis " and "The commitment problem hypothesis". To gauge the explanation power of these interpretations, we study the level of capital flows , the composition of capital flows and the nature of crises in emerging markets countries. Our conclusion is that no one of these three explanations alone can fully explain the facts.Section 4, namely chapter 8, is about the asset prices fluctuation and microeconomic policy .In this part we examine the implications of asset price fluctuations for the conduct of monetary policy. The bubble economy experience both in developed and underdeveloped countries proved that an asset price bubble produces serious adverse effects on the financial system and on the economy when bubble eventually bursts. Moreover , the effect of asset price changes is asymmetric, with stronger effects in the case of an asset price decline than rise up. Monetary policy is required to respond to the potential risk of future asset price bubbles in a preemptive manner. In so doing, the central bank should aim at not only the price stability but financial stability. And the two objectives of central banks can be considered as complementary in the s...