Stock Price Volatility And Monetary Policy

Since the last two decades of the 20th century, Inflation has been subdued in the main countries of the world. In contrast to it, The asset prices have moved strongly, particularly in the stock market. The Japan's bubble in 80's end, the united states stock market crash and credit crunch in 1987and 1991 respectively, the Asian finance crisis in 1998 are all the vivid examples. These stock markets surges gave rise to macroeconomic instability.At the same time, several changes have taken place in the monetary policy environment: (l)central bank independence has been recognized as an important factor for inflation control, and it has been implemented or consolidated in many countries, (2) price stability has been adopted as the most important, if not only, objective of central bank policy, and (3)central bank operating procedures have evolved so that short-term interest rates now constitute the principal operating target, and monetary aggregates are no longer very high on the list of variables that are monitored. In such a background, the economists began to explore the role of assets in the designing and operating of monetary policy. In other words, economists have attempted to seek the role of assets in Taylor rule. Mark Gertler(1998)mentioned that "the issue of financial stability has become one of the most discussed issues among monetary authorities" .Fernando Alexandre(2002)showed that several factors can explain why financial markets have becme so important for monetary policymakers. Fist, the extraordinary development of financial markets since the beginning of the 1980s which was accompanied by an increasing importance of stock markets as a share of families' wealth in developed countries. To this development have contributed importantly the deregulation and privatization since the beginning 80s(see, for example, Shiller:2000), Second, the world increasing economic interdependence, due to the globalisation and deregulation of financial markets, contributed to increasing uncertainty and higher asset markets volatility. Third, the recovery in last decades of a trend in economic research that goes back to the centerof business cycles explanations and highlights their relevance in the transmission mechanism of monetary policy.Stock market is one of the most important asset markets. Its volatility is not only associated with other asset markets, but also gives rise to and transmits volatility of the latter. Many economists argue that monetary policy is one of the causes that contribute the emerging of stock market bubbles. In America , monetary policy has been concerned about the stock market for a long time.Greenspan"has often been blamed to give rise to the NASDAQ bubbles in American stock markets since his asymmetric policy responding to the it ( Gerhard Illing,2001) .The supporter of this opinion argued that Fed easing money had rescued the credit distress caused by LTCM's bankruptcy , while it had doing nothing to protect the consequent NASDAQ's bubbles. It is fortunate this asymmetric responding had not given rise to any disturbance. In contrast to it ,The Japan's experience in 1990s showed that asymmetric responding cause the credit crunch and the consequent deflation. The above examples show that stock market bubbles are relevant to monetary policy.For china this problem has special significance. China's stock market has been established for a short time, therefore it is a developing market and has more volatility than those developed markets. On the other hand, China's stock market has more responsibilities, for example , optimizing the financial structure, doing a favor for the state ownership company's reforming, and so on. The above features required stock market should developed at a suitable speed. Therefore, the relationship between stock market and monetary policy is more complicated than those developed markets.The research thoughtway of this dissertation is as follows: firstly, I analyze stock pricing and its causes of fluctuations. Then the analyzing of relationship between stock price volatility a...