Monetary Policy And Asset Prices

In recent years, fluctuation of macro-economy and finance in the developed and developing countries becomes more and more prominent. It requires that we should understand risks in-depth in different risk environment and comprehend the relationships among important variables in the real macro-economy. In financial crisis, we must consider the relationship between monetary policy and asset price. Stock prices and real estate prices are important index of asset prices and they are regarded as the proxy variable of asset prices. There are two opposite viewpoints about whether monetary policy should intervene in asset prices. One stands the viewpoint of nonintervention that the aim of monetary policy is to hold the traditional inflation; and the other maintains the viewpoint of intervention. It is believed that asset price includes the information of future inflation and monetary policy can effectively control inflation by intervening in asset bubbles.After the subprime mortgage crisis, the western countries'attention to macrofinance model soars to unprecedented heights. In terms of methodology, the dissertation takes advantage of the well-developed software DYNARE of DSGE (Dynamic Stochastic General Equilibrium) to operate the numerical simulation of the relationship between asset prices and monetary policy in China. We also make quantitative analysis of the relationship between asset price and monetary policy with the help of VAR toolbox in E-VIEW. The conclusion is that the relationship between asset prices and monetary policy is very complex.Theoretically, we extend the DSGE model of macrofinance, especially the BGG model from three aspects. BGG model founded by Bernanke, Gertler and Gilchrist (1999) is the cornerstone of macrofinance. First, in the BGG model, discounted-cash-flow method is used to price assets. We incorporate asset pricing method of Backward Stochastic Differential Equation into the BGG model so as to better measure asset prices bubble. Next, referring to financial accelerator, we utilize the newly-developed sticky information theory to set up a new model:FSIGE (Financial Sticky Information General Equilibrium). Sticky Information is added to the price of capital produced by capital producer. Sticky Information is a financial accelarator since sticky information can enlarge the fluctuation of major economic variables when facing technology shocks. The experimental result is closer to reality. If there is no financial sticky information, the Central Bank can consider the monetary policy with asset prices to control inflation. However, when financial information is sticky, monetary policy should be more aggressive, or the economy may be overheated and run into inflation. Last, in the property market we investigate the response of property market (durable goods) and daily necessities (non-durable goods) market to monetary policy changes. Based on the latest theory of heterogeneous agents, we set up Heterogeneous Dynamic Stochastic General Equilibrium Model (HDSGE) based on the reality in China. Due to different discount rates, there are two types of agents in the market: the borrower (the house developer) with borrowing constraint and the saver (the family). We examine the economy of only durable goods sector with borrowing constraint. This benchmark model is more similar to Chinese economy because in China, the property price is too high for the household and the country. The Central Bank must control the rising property prices for the land accelerator expands the risks. In the economy with durable goods and nondurable goods sector, if the borrower has borrowing constraints and the Central Bank adopts weak policy to the price of durable goods and strong policy to inflation in nondurable goods market, the economy would be faced with a relatively big shock mainly due to high financial leverage in durable goods sector. In China, monetary policy should be taken according to business cycle and act wisely. Studies show that if the Loan to Value (LTV) of the developers is too high, risk would arise due to borrowing constraints. Extreme monetary policy may cause great damages to developers; macro-economy may collapse as in America. We conduct simulation research with the model of Iacoviello (2005). With negative monetary shock, besides markup and interest rate, other economic variables fall, especially debt and real estates, but relatively slightly. This is determined by China's special financial system.Econometrically, we estimate the relationship among Chinese real interest rate, inflation, Index of Shanghai Stock Exchange, housing prices and GDP using the VAR model. Through impulse reaction experiment, it is shown that the interest rate policy has small influence on asset prices. However, asset prices can greatly influence the interest rate policy. The interest rate is nearly going in opposite direction to asset prices. The Central Bank is subsidizing investors and it is harmful to build the consumption-orientated economy in China. By variance decomposition, we find that fluctuation of those macroeconomic variables, especially monetary policy and asset price mainly results from CPI followed by GDP. It is consistent with Chinese Central Bank'stance:target inflation and then output, but asset prices are ignored somehow. Chapter â…  contains research problems, research methodology, research ideas and reviews in and out of China. Chapter â…¡ is the research of uncertainty. We study asset bubbles by backward stochastic differential equation and apply it in the BGG model. In Chapter â…¢, sticky information is incorporated into BGG model and the relationship between monetary and asset prices is investigated in this framework. In Chapter â…£, we set up DSGE model with heterogeneous agents (the borrowed and saver), based on Chinese property market and study the relationship between monetary policy and housing prices. Finally, econometrically, VAR model is used to estimate the relationship between monetary policy and asset prices:housing and stock prices and an instructive conclusion is made at last. We hope that this dissertation can enlighten the further researchers on monetary policy and asset prices.