Asset Prices And The Choice Of Generalized Monetary Policy In China

As asset markets develop, the impact of asset prices on economy is more and more obvious. The two main aspects are as follows. First, asset prices have changed the traditional monetary policy transmission mechanism and the inflation formation mechanism, which causes stable prices of goods and service and fluctuating asset prices to coexist. Second, the boom and bust in asset prices often leads to financial crisis and even economic crisis. The impact of asset prices on inflation formation mechanism and financial and economic stability poses a challenge to central banks all over the world. Therefore, this paper does a research on several important problems as follows:How do asset prices affect economic and financial stability? How should the central banks use monetary policy to respond asset prices in order to maintain the stability of inflation and output? How should monetary policy and financial supervision coordinate to take precautions against and reduce asset prices risks? The risk of asset prices bubble is one of the main risks in China, and the exit of the loose monetary policy is one of the most popular topics in the field of theory and among people. As a result, analyzing asset prices and the choice of monetary policy is very valuable and meaningful for China.Instead of repeating the research on the role of asset prices in the monetary policy transmission, this paper probes into the problem on how the monetary policy should respond asset prices to realize the goal of the stability of inflation, financial system and economic growth from a more operable perspective. The plot of this paper is to build a broad monetary policy framework including traditional monetary policy and financial supervision to aim at the direct and indirect impact of asset prices on economy.The direct impact of asset prices is that asset prices have wealth effect, Tobin Q effect, balance sheet effect and expectation effect on economic agents'consumption and investment behavior and on the future output and inflation. Aiming at this kind of impact, this paper constructs the dynamic financial condition index as one of indictors of monetary policy using asset prices to extract and synthesize the information on future output and inflation. Then within the bound of estimated IS-Phillips model of China, this paper resolves the problem of minimizing the central bank's loss and gets the optimal interest rate reaction function taking asset prices into consideration, in which the asset prices variable can be composed to be the dynamic financial condition index. The researching results show that the dynamic financial condition index reflects well the condition of Chinese monetary and financial condition and contains relevant information on future output and inflation, which make it an effective indicator for Chinese monetary policy. What is more, in the condition that asset prices have already affected real economy, monetary policy's disregarding asset prices would lead to bigger loss. However, Chinese monetary policy have accommodated the fluctuation of asset prices instead of responding asset prices correctively. Therefore, this paper suggests Chinese central bank should make up and publish regularly the financial condition index, and adopt the hybrid inflation targeting framework and its endogenous interest rate reaction function, in which the interest rate can adjust to the financial condition index.The indirect impact of asset prices is that the boom and bust of asset prices may incur financial instability, and may cause real economy to fluctuate. As Chinese financial system takes the commercial banks as the main body and real estate price is one of asset prices that can incur banking crisis most easily, this paper analyzes the relationship between real estate price and banking soundness in China. The researching results show that the real estate price has a positive impact on banking credit significantly, while the bank credit's impact on the real estate price is positive insignificantly. And the real estate price has significantly positive impact on individual bank's soundness. These results reflect a procyclical relationship between real estate price and bank credit and the fluctuation of real estate price have form risks on banks. Aiming at this kind of impact of asset prices, this paper proposes a set of strategies to guard against and defuse asset prices risks. To be specific, this paper suggests to enhance the supervision of bank credit, control the asset prices risks exposure and the moral hazard of financial institutions, improve the strength of financial institutions and foster effective asset market in order to immunize financial institutions against asset prices risks and restrain them from pushing asset prices bubble. And this paper also suggests central bank to use differential interest rate, window guidance and required reserves ratio to adjust the direction and scale of money towards asset markets in order to control obvious asset prices bubble. After the burst of asset prices bubble and subsequent financial crisis and even economic crisis, the central bank should inject money timely, while avoiding another expansion of asset prices.The innovations of this paper are listed as follows. Firstly, this paper builds a broad monetary policy framework composed by interest rate, financial supervision and regulation and capitalization to respond asset prices and guard against and defuse asset prices risks in order to realize the stability of inflation, output and financial system. Secondly, on how the interest rate should respond the fluctuation of asset prices, this paper puts forward more operational suggestion, that is, to compile and publish regularly financial condition index and to take the hybrid inflation targeting framework and its endogenous interest rate reaction function, in which the interest rate adjusts to the financial condition index. Lastly, on the econometric method, this paper uses a state space model, a smooth transition model and a panel data model to take the possibility of time-varying impact of asset prices on economy and nonlinearity of monetary policy into consideration and analyze the relationship between real estate price and banking soundness and its features from a micro-perspective.