Asset Price Volatility And Monetary Policy, Financial Supervision

In the past 20 years, the central banks have made great achievement in controlling the inflation of ordinary goods and services. But frequent fluctuation of asset prices, as well as several systemic financial crisis and economic depression caused by the collapse of asset markets, have forced the central banks to research deeply the information conveyed by the asset price fluctuation, and to resolve it. On the other side, the central banks in more and more countries have separated the duty of financial supervision from monetary policy. Since it is an important stylized fact that the great fluctuation of asset prices is accompanied by the financial crisis, people have begun to research the effect of financial supervision in controlling the asset price bubbles, and the cooperation of financial supervision and monetary policy, when they discuss the relationship of asset prices and monetary policy.We can think of this problem in two ways. Firstly, In view of final objective, monetary policy should stabilize the prices as well as the economic growth in some countries. However, the fluctuation of asset prices may contain important information about future inflation. In addition, asset prices probably are important channel for the transmission of monetary policy through the wealth effect, Tobin Q effect and balance sheet effect, which influence output and future prices. Secondly, the central banks have the duty to realize financial stability. Nevertheless, the fluctuation of asset prices is closely linked with bank panic and financial crisis, and threatened the realization of financial stability. As a result, the central banks should take measures to intervene in the price fluctuation, and prevent the adverse effect of the boom-bust of the bubbles. Anyway, the central banks have the duty to realize price stability and financial stability, but it has been proved that financial stability is not the side-product of price stability. So, the central banks and financial supervision authorities must research the relationship of monetary policy, financial supervision, and asset price fluctuation in two ways.This paper has made sufficient theoretic and empirical research, and analyzed the experiences of asset prices boom-bust in many countries. The conclusion is that monetary policy should intervene in abnormal asset prices fluctuation properly. Furthermore, financial supervision should react to asset prices in harmony with monetary policy for the robust and flexibility of financial system.