Stock Market Development And Monetary Policy Efficiency

In the recent years, the fast development of the stock market has influenced the process of the manipulation of monetary policy. The central banks are faced with the problem of how to increase the monetary policy efficiency in this case. Meanwhile, the explaining power of the traditional monetary policy theories has been negatively affected too. It is of great practical and theoretical importance to study the influence of the stock market development on the monetary policy efficiency. This paper will study how the interaction of the microeconomic agents' behaviors has influenced the monetary policy efficiency when the stock market has developed to a certain degree.The development of the stock market has provided a new asset for the microeconomic agent, which has changed the micro-foundation of the monetary policy. According to the assumption of intertemporal utility maximization, the microeconomic agent will hold his assets in the form of hoarding money, consumption, business investment and stock investment proportionally, which will in turn change the agent's money demand, consumption and investment. With the development of stock market, the micro-foundation of monetary policy has changed. When the central bank manipulates monetary policy, the stock market will change the microeconomic agent's response to the monetary policy, so the mechanism of monetary policy will change too. In reality, the microeconomic agent will be faced with the problem of incomplete information, which will let him unable to adjust their assets as he does in the world with complete information. In the world with incomplete information, when the central bank begins to manipulate monetary policy, the microeconomic agent will make hisown strategy according to others' strategy. There will be a monetary policy game among the microeconomie agents. To maximize his own payoffs, the microeconorm'c agent will emulate others' strategy; otherwise he will meet a loss. In the process of monetary policy game, the different state of stock market will determine the number of the equilibria. Hence the stability of the monetary policy effect has been greatly influenced. Well-functioning stock market will stabilize the monetary policy effect, while the ill-functioning stock market will increase the number of the monetary policy game's equilibria to make the monetary policy's effect less stable. Besides, a well-functioning stock market can convey accurate information to the microeconomie agent, and magnify the monetary policy effect through its influence on the monetary policy transmission mechanism, which will make the microeconomie agent more confident in the monetary policy and enhance the credibility of monetary policy. According to the payoff dominance theory, focal point theory and cheap talk theory of the decision of game's equilibrium, in the process of the monetary policy game, all the microeconomie agents will adjust their behaviors actively. On the contrary, in the ill-functioning stock market, the microeconomie agent will be less confident in the monetary policy effect. In this case, he will not respond positively to the monetary policy, which will lower the monetary policy effect.Based on the theoretical analysis, the money demand, money multiplier, velocity of money and the monetary policy transmission channel have been studied empirically with China's relevant indicators to find the influence of the stock market on the monetary policy efficiency. The results show that China's stock market has exerted a weak influence on the narrow money demand, but with no significant influence on the wide money demand. The money multiplier and money velocity have been positively influenced to a weak degree. In addition, the development of China stock market has positively influenced the loan channeland the asset portfolio channel of the monetary policy transmission to a certain degree. It means that the development of China's stock market has had a positive influence on the monetary policy efficiency to a weak degree. The results show that when the stock price index has been increased by the healthy development of China's stock market, the monetary policy will be more efficient. On the contrary, if the stock market price increases as the result of bubbles, the monetary policy efficiency will be lowered. So, in China, it is necessary to develop the stock market to increase the monetary policy efficiency. The central bank cannot intervene the stock market arbitrarily for a short-term motivation.With the fast development of the stock market, it is necessary to reform the monetary policy manipulation system and to further develop China's stock market to increase the monetary policy efficiency. From the present point of view, on the one hand, the present monetary policy manipulation method should be improved; on the other hand, the resource allocation function and the information conveyance function should be fully developed in the stock market.