On The Impact Of Stock Market Development On Monetary Policy

Some countries who are stable in the interest rate and the price index and the domestic real economy prensented the economic violent fluctuations since the 1980s. The motive force source that fluctuated did not come from the macroeconomy factor, but from financial market, especially the violent fluctuation of the stock price . Under this background, the relation between the stock market and monetary policy becomes a hot problem in monetary theoretical research. This paper discusses the inherent mechanism of the influences of stock market on monetary policy through the multiple perspectives analyses of the impact of stock market development on monetary policy, and then offers the reference of decision and theoretical base for the regulation of monetary policy whose problem is whether the monetary policy should pay close attention to the stock market and how to control money. The subject matter that the study should solve is whether central bank should pay close attention to and intervene the stock market when monetary policy is operated under stock market development. The way to solve the problem is to clarify the effect of the stock market on monetary policy at first, then answer the problem which is whether monetary policy should pay close attention to and intervene the stock market. We have studied the relation between the stock market and monetary policy goals at first. Stock market connects closely with inflation . Not including assets prices such as prices of stock etc while measuring inflation will lead to mislead seriously.Especially, while general price level is steady and the stock rises violently, we may make central bank judge the situation mistakenly and the economy presents the bubble danger of the assets if we do not bring assets price within the monitoring range of the inflation . The Fisher effect is untenable and the real stock returns will drop when the inflation rises on our country, the inflation having increased the risk of stock market. The influences of stock market on economic growth depend on the very great degree the stock market function itself displays and on the macroeconomy environment ,also on the economy development phase as well as the economic policy. The empirical study result for our country indicates that the stock market is not very remarkable to economic growth beause our market is not perfect. The stock market has contacted closely with employment. International capital movement can influence the stock market through interest rate and exchange rate . The degree of impact of international capital movement making on stock market is related with degree of opening economy and internationalized degree of the stock market .Whether the exchange rate change make an influence on stock markets concerns with the fact that every intermediary element could totally function normally . The stock price have influences on the balance of payments through influencing interest rate and exchange rate. Stock price rising might cause financial market interest rate rise and also may cause international capital inflow and cause the exchange rate to rise further, then cause influence on the balance of payments further. We have discussed the effect of the stock market on intermediary target of the monetary policy. The enlargement of stock market scale causes the monetary demand to increase and increases the unstability of monetary demand function. The development of stock market will slow down the speed of money flow. Stock market will bring influence on money supply structure and total amount too. The empirical study indicates that our stock market is influential to the money supply change, but the influence effect is different for the different money supply . Exerting an influence on the interest rate by stock market is through two ways mainly: First, the horizontal changes of relative price of different financial instruments will make an influence on the supply and demand of the fund and then influence the interest rate; Second , stock market make an influence on the interest rate tendency of the market through changing the expectation of investors to economic future. Stock market development makes the accuracy and dependability of monetary quantity regular decline. The empirical study result indicates that our stock market has already begun to exert an influence on intermediary target of the monetary policy. On the whole , the influence is not very strong, but it is being strengthened constantly with promotion of the stock market. Bubbles and final collapse of stock market will exert a great influence on real economy, and bring serious destruction to financial stability. One channel of stock market influencing on real economy is that it make an influence on consumption .The change of the stock market causes the change of wealth of household, and the changes of wealth must cause the change of consumption expenditure of household . The wealth effect of stock market has asymmetry nature, and makes pushing out of consuming. The second channel is the influence on investment. Stock market makes influence on investment by many channels. Empircal analyse of the relation between the stock price and investment of our country shows that the effect of stock market on investment ability and entrepreneur's confidence and the solid assets investment is not obvious. An important reason which causes this kind of phenomenon is the pushing out of of productive investment of equity investment. Financial fragility will happens because enterprises and family department are excessively in debt. Some unwisely behaviors of the financial institutions may aggravate the stock market-debt crisis cycle . One possible explanation of unwisely behaviors of the financial institutions is underestimating to the low probability's impact event, it causes the financial institutions to underestimate the suddenly collapse of stock market.At the upward stage of stock market, the financial institutions may display the misleading profitable sign .Information asymmetry can lead to the fact that the unwisely behavior exist. The stock market fluctuations impact on the stability of financial system by many channels which includes the credit risk and market risk and profitability declining risk and influencing subsidiary body and " second round " effect . It will make an important role for analyzing the problems macroeconomy faces to and measures we must make under the condition of stock internationlization.While analysing the effect of monetary policy under the open stock market condition, we assume that the substitutability of the stock and bond is not complete. At the same time we extend Mundel -Fleming's model to our analysis frame .We have introduced to this factor of the stock market in the financial department to derive out our model. Our analysis shows that the relatively effective view of monetary policy that Mundel -Fleming's model points out, may not be suitable for the new market country . Exchange rate mechanism is favorable for slowing down the impact of world interest rate rising or terms of trade worsening. Our research indicates that the flexible exchange rate is a feasible choice. Whether stock market should be taken as monetary policy intermediary target is an important theoretical problem and is disputable. We think that the monetary policy should pay close attention to the impact of stock price fluctuation in the long-term on finance and economy stability . In order to reach this purpose, central bank needs to confirm whether stock price fluctuation response stock inherent decisive factor at first. Because of the mistaken adjustment of stock price, or serious negative effect of stock price bubble evaporating on financial system and macroeconomy, monetary policy need to make a response in advance to stock price bubble in the future after analysing the reason of the stock price fluctuation correctly . In a word, we have analysed the relations between stock market and monetary policy from the theory and empirical test through more comprehensive research on the domestic and foreign references. We have probed into the impact of stock market on monetary policy and regulation problem of the monetary policy under the stock market development background. We think , under the background that the stock market is growing , the challenge that the monetary policy faces to is greater and greater and the way of regulating monetary policy should be adjusted correspondingly.