Fluctuations In Asset Prices And The Central Bank's Policy Objectives

With the development of economic theory and practice, the objectives, functions and policies change continuously. In the past several decades, the changes mainly include two aspects: First, price stability became the most important, even exclusive, objective of central banks' monetary policy; Second, ensuring the financial stability became an important responsibility of most central banks. During the past twenty years, central banks in developed countries have been remarkably successful at reducing and stabilizing inflation. Meanwhile, the policy decisions are increasingly disturbed by asset prices fluctuation. In the inflation target framework, central banks cannot ensure the stability of asset prices in the same time of keeping price stability. The asset prices fluctuation not only has impacts on inflation, but also causes systematic financial risks such as credit crunch and banking panic which can lead to financial crisis and economic depression. Then it is very important for central banks to research deeply the information conveyed by asset prices fluctuation, analyze the impacts on two main objectives, and work out how to deal with asset prices fluctuation.The thesis analyzes the channels in which asset prices fluctuation impacts on the two major policy objectives of central banks: price stability and financial stability; explores the policy predicament of central banks, and designs the policy framework of central banks to deal with asset prices fluctuation. According to the empirical analysis related to China, the thesis also comes up with the reasonable suggestions how to deal with asset prices fluctuation for central bank of China.The thesis analyzes the creation and the background of the topic, the present research achievements domestic and abroad, the analysis methods, the possible innovation of the thesis and something need improve. The thesis discusses systematically the two mainstream objectives of central banks- price Stability and financial Stability, and the policy framework of central banks to achieve this two objectives. The thesis analyzes the channels through which asset prices affect price stability and does empirical analysis on the influence of asset prices on consumption and investment in China. The thesis analyzes the impact of asset prices fluctuation on financial stability and discusses the situation in China. The thesis studies the relation between price stability and financial stability and the policy predicament of central banks in the condition of asset prices fluctuation. The thesis analyzes theoretically the relation between credit, interest rate and asset prices fluctuation and does empirical analysis on the relation in China.On the basis of above studies, The thesis designs the policy framework of central banks to deal with asset prices fluctuation and comes up with the reasonable suggestions on how to deal with asset prices fluctuation in China according to the related empirical analysis. The main opinions of the thesis could summed up as three points: From the perspective of objectives, central banks should make choices between the two objectives according to priority due to the conflicts of the two objectives; from the perspective of policy rules, because asset prices fluctuation could impact inflation through consumption, investment and expectation channels, central banks should improve the decision function of monetary policy and adjust the policy rules; From the perspective of policy tools, central banks should adopt diversified tools to deal with asset prices fluctuation according to the difference of influence of credit and interest rate on asset prices.