A Study On China's Stock Market As A Transmission Mechanism Of Monetary Policy

The effect of monetary expansion or tightening is transmitted to the real economythrough the financial system. As for the traditional financial market, banking system is anextremely important transmission channel of monetary policy. As China's stock marketdevelops, the stock market is becoming more and more important to the aggregate demand.However, since the history of China's stock market is not long enough, many aspects arerestricting the transmission capacity of the stock market, which makes the impact of stockmarket on aggregate demand running in the opposite direction compared with target ofmonetary policy. At present, the stock market's impact on aggregate demand might not beso obvious in China. However, with the development and expansion of the stock market,stock market as a transmission mechanism of monetary policy will be increasinglyimportant. The purpose of this dissertation is to improve the monetary policy transmissionmechanism and enhance the effectiveness of monetary policy. The conclusions of thisdissertation are as follows.Firstly, stock market is an important component of national wealth. The fluctuation ofstock market will affect national wealth. The stock market influence the total demandmainly though its wealth effect, Tobin's Q effect, as well as influencing the bank credit'sagency cost to affect the Bank-to-business credit supply, bank's own risk preferences, andcorporate managers' risk preferences. Another important issue is the stock marketfluctuation's " ratchet effect ", which means, when the stock market prices go up anddown,the impact of stock market fluctuation on macroeconomic is asymmetric. It wasextremely obvious when the financial crisis occurs.Secondly, the realization of financial system's role as an effective transmissionmechanism depends on the system's ability to deal with asymmetric information. But thelarge swing of stock price may exacerbate information asymmetry, which leads to financial crisis. Continued growth of the stock market bubble may result in severeeconomic shocks, which verifies the importance of government intervention. When thefluctuation of stock market is not severe enough to trigger a financial crisis, the centralbank should implement a monetary policy pegged to inflation, which is sufficient to dealwith the fluctuation impact on aggregate demand. However, when the stock price triggeredthe financial system instability, the central bank should adopt an expansionary monetarypolicy, carry out the responsibility of "the ultimate lender", and ensure the liquidity in thefinancial market whenever necessary.Thirdly, the monetary transmission mechanism of China's stock market doesn't workwell. The main reasons of these are as follows. Government does not attach importance tothe monetary transmission mechanism of the stock market. The stock market is facingmany problems, such as small scale, irregular operation, imperfect equity structure oflisted companies, imperfect market structure, policy interference etc. The development ofstock market is relatively faster than monetary market. And the stock market is separatedfrom the monetary market.Fourthly, in order to improve the monetary policy transmission mechanism andenhance the effectiveness of monetary policy, this dissertation puts forwardcountermeasures as follows: Improve the stock market fundamentally. Speed up thedevelopment of monetary market. Coordinate the development of the monetary marketand the stock market. Establish a normal channel for credit funds to flow into the stockmarket. Prevent credit funds from flowing into the stock market illegally.As for research content and methodology, this dissertation has the followinginnovative points:(1) Traditional research examines the relationship between stock market andmonetary policy through nominal variables such as interest rate, money supply etc. Thisdissertation studies the transmission mechanism of stock market based on real variables ofaggregate demand. (2) Based on agency cost theory, this dissertation analyses the effect of stock marketfluctuation on agency cost of bank credit. In other words, the two transmission channels ofmonetary policy, namely stock market and bank, are considered integrally.(3) From the angle of consumption and investment, this dissertation studies theessence of the US sub-debt crisis and its impact on China's economic pattern in the longterm.