Asset Prices And The Optimal Monetary Policy In China

Along with the development of the capital market, the impact of asset prices onmacroeconomic is increasingly deep. This is mainly embodied in two aspects: Firstly,the asset prices have changed the traditional monetary transmission mechanism andinflation formation mechanism as to make the economy operate in the generalcommodity price stability and violent fluctuation of asset prices. Secondly, theexpansion and burst of the asset price bubbles often leads to the financial crisis eventhe economic crisis. An important feature of macroeconomic operation of manycountries all over the world is the stability of the general goods and service so farfrom1980s, and the asset prices including stock market, real estate market, bondmarket and foreign exchange market all appeared more greatly and frequentfluctuations than ever before. After the circulation of the inflation and breakdown ofthe asset prices, the financial crisis, inflation and recession are often followed by.The shock of asset price bubbles collapse on the financial stability and the outputstability has become a challenge to the traditional monetary policy. And the CentralBanks and scholars began to reflect that the monetary policies which only consideredthe general goods and services and neglected the asset price fluctuations was theoptimal policy to maintain the stability of prices and output or not? The great impactof the real estate price bubble burst on the financial system and the real economy inthe United States even all over the world in2007made the researchers to reach aconsensus that is the general commodity price stability is neither enough to achievethe financial stability nor enough to realize the stable output. So, the monetary policyshould consider more about the asset market factors and respond to the greatfluctuations of the asset prices? For China, the stock market boom and slump andreal estate prices continue rising led to worries to the asset price bubbles risk and therequirements voice of bailout policy breaks here and there. Therefore, the analysis ofasset price and the optimal monetary policy in our country has a certain theoreticalmeaning and realistic significance.There are great differences and controversy on the problem that the monetary policy is necessary to respond to the asset price bubbles or not whether in theory orin the central bank’s monetary policy operational level in most countries. The maindifferences are embodied in three points: Firstly, do the asset price bubbles have asignificant impact on the monetary policy objectives that are the output and inflationstability? Secondly, does the central bank can detect and recognize the asset pricebubbles process in good time? Thirdly, is the intervention of the traditional monetarypolicy tools to the asset price bubbles effective?According to these problems, this paper makes a system of research adoptingnormative analysis and empirical analysis. The finding concludes three aspects: First,the test of the single species of asset prices monetary policy transmission mechanismin the stock market or the real estate market shows that monetary policy conductionto the asset markets is much more smooth and the conduction to consumption andinvestment are not so smooth. Second, the asset price index which is composed ofthe stock prices, real estate prices and real effective exchange rate has a significantcausality with the output and inflation, and this can be used to predict the futureinflation and output. And, the asset price index has a significant response to themoney supply shock. The intervention of the monetary policy on asset price iseffective. Third, the economic simulation basing on price index shows that thecentral bank losses is much lower than in the optimal monetary policy reactionfunction which does not contain asset prices.Based on these research conclusions, this paper puts forward relevant policysuggestions: we should draw up the asset price index and publish regularly in orderto cultivate the public consciousness rational investment and restrain the excessivespeculation in asset markets. We should use asset price as a measure of unbalancedasset price instead of asset price bubbles and make the absolute value standard of theasset price fluctuation to be boundary of the monetary policy intervening assetmarkets. We should bring the price index into monetary policy system and payattention to it but do not keep a close watch on it to control the great rise of the assetprices in good times and reasonably. We should strengthen the supervision to thebank credit and control the risk exposure of asset price in financial institutions toreduce the impact of asset price bubble to the economic entity. In the end, we should adjust currency scale to the capital market through the monetary policy toolsincluding the differential interest rates and window guidance.