Research On Asset Prices Volatility And Macroeconomic Stability

Since 1980s, while the most of countries worldwide keep the inflation under control effectively, the asset prices volatility become a headache for macroeconomic policy makers. The great volatility of asset price, especially the asset bubble and its collapse has become a new and important shock source to macroeconomic stability. This problem is attached with so much theoretical and practical significance that researchers have been focused on what determines asset price, what is the relationship of asset price and macroeconomic stability.First, this paper researches on the asset price determination and volatility, establishes a general equilibrium model, which is based on the hypothesis of complete rationality and complete information, to analyze the determination of asset price. But, the empirical analysis and theory analysis are not consistent at all. Therefore, based on the hypothesis of bounded rationality and limited arbitrage, author sets up a model about asset price volatility from the point of view that investors may form wrong beliefs.Second, the author points out that the wealth effect of households and the Tobin q effect of firms are intelligible from the economic intuition, which means households would feel wealthier and consume more if asset prices rise, as well the firms would invest more facing lower financial cost. Although theoretical analysis proves that the asset prices would influence aggregate demand through the wealth effect of households and the Tobin q effect of firms, this paper proves, based on the results of empirical researches, that the wealth effect of households and the Tobin q effect of firms don't have so much influence on macroeconomic stability. In other words, only through the wealth effect of households and the Tobin q effect of firms, the asset prices fluctuation could not make crisis influence on macroeconomic stability. Subsequently, on the foundation of summarizing some general features of the asset price bubble, this paper investigates several representative asset price bubble events, and analyses the causes of the asset price bubbles and collapses. Based on the historical stylized facts from bubble cases which are learnt above, author thinks that there is a much close relationship between the bubble event and the credit level, while traditional finance theory based on rational expectation and arbitrage equilibrium failed in providing a reasonable answer. Moreover, based on the transferring the risk from investors to banks through the channel of bank credit, this paper constructs an asset price bubble model, which is derived by the credit expansion.Third, the author reviews the relationship among money, credit and asset, and argues that with the pushing of economics, the credit expansion also pushes the volatility of asset price. At the same time, from the viewpoint of the asymmetric information in financial system and the financial stability, this paper researches the credit channel which is the influence mechanism between the asset price movements and macroeconomics stability. On one hand, asset price bubbles make impact on credit. On the other hand, the change of credit drives asset price fluctuate, and causes the times expansion and contraction of the firms'investment demand and households' consumption demand, through credit multipier mechanism. Consequently, a tiny shock could make a great effect on the financial stability and macroeconomic stability. Furthermore, on the base of the research above and the financial accelerator model provided by Bemanke, a general equilibrium modle, which takes into account of asset price bubbles, is creatively formed to study the multiplier effect that credit lays on asset prices, and also to study the macroeconomics and financial market equilibrium. Accordingly, the model concludes that, in one hand, the expansion and contraction of credit are the key mechanism of asset price volatilities influencing on macroeconomic stability. The asset price volatilities themself cannot wholly account for the influence on the macroeconomic stability. Researchers should focus on the credit changes caused by asset price volatilities. On the other hand, the initial state of balance sheets of the whole economy is very important in the beginning of asset price volatilities. If the initial debt ratio is high, then the collapse of asset price will bring about strong contraction effects. However, if the initial debt ration is not high, then even the large scale collapse of asset price will not bring about large impact on macroeconomic stability. At last, author brings out an opinion that the asset price collapse would induce financial crisis, which would make server influence on macroeconomic stability, through impacting on financial stability.In the end, the author points out the dilemma which monetary policy makers are often faced; as well adopts comparative static analyzing in the model, and gives some new suggestions for monetary policy makers, based on the conclusion that monetary policy interfering on asset price volatility can improve macroeconomics. The article gives a summary on all the above research, and points out a possible research direction in future.