Liquidity Shocks And Asset Price Volatility Research

The Sub-prime crisis is the most profound global economic event since the beginning of21century. After the outbreak of the crisis, most countries adopted the keynesian and actively took steps, such as capital injection, interest rate cut, easy credit and great construction project launch. However, the results are not as good as we expected. For one thing, it’s a long way for the recovery of U.S. economy; Europe is bogged down in struggling against debt crisis, Japan’s economy is still weak, and the emerging countries fall into the predicament of significantly downward. For another, the price of virtual assets rise rapidly, because of the quick and powerful propulsion of these policies, the central banks’balance sheet expand rapidly, the representative stock indexes of U.S., British and French have already exceeded or got close to the highest level with solid economic fundamentals in year2000or2007. The inconsistence between the real economy and virtual economy is worth our vigilance and ponder.When we review each of the asset bubble since20th century, such as U.S.’s bubble in1920s, Japan’s bubble in1980s, Mexico’s bubble in year1994, Asian financial crisis in1997, U.S. IT bubble in2000and U.S. bubble before sub-prime crisis in2007. Every time, people seem to have abundant reasons to say that’this is not the same, and economic prosperity can be sustained’before crisis. However, if we analyse the process from boom to bust carefully, every crisis is accompanied by complete process of liquidity shock, at the beginning expanding sharpely, then reversing, and at last falling into great shortage. Meanwhile, every crisis is accompanied by complete process of asset price volatility, at the beginning increasing rapidly, then reversing, and at last collapsing. They all verify’this time is not different’, which is the gist of Rogoff and Reinhart’s latest book’this time is different?’In the recent global economic system, most economies implement credit currency system inside and managed floating exchange rate system outside, and they always have to face the difficulty of keeping the proper level of liquidity to promote economic growth. So, the research on liquidity shock and asset price volatility, especially in different countries and different development periods, not only can help us to have a more in-depth understanding of the development of the recent economic crisis, but also have great significance for the reference of making reasonable macroeconomic policies.This paper’s title is’the research on liquidity shock and asset price volatility’, this paper focuses on the process between liquidity shock and asset price volatility, does comprehensive research on the theoretical mechanism of liquidity shock and asset price volatility and their interaction in different countries. This paper has five important parts.The first part, clarification of the concepts and keypoints. This paper introduces the theories of liquidity, liquidity shock, asset price and asset price volatility, liquidity shock and asset price volatility and so on. This paper clearly defines the important concepts and comes up the empirical indicators, which offers a clear conceptual premise for further discussion.The second part, establishment of theoretical framework. Based on the analysis of the capital cycle theory of Karl Marx and other latest ideas and theoretical models, this paper chooses the measurement of current and financial accounts as the start point, comes up with the theoretical framework of the production of liquidity shock and its influence. Through the dichotomy of money supply and demand theory, and the dichotomy of quantity theory of money, this paper interagates them with Abel&Bernanke model, then establishes the first and second order transmission mechanism of liquidity shock and asset price volatility. Otherwise, the transmission of different development periods is also contained. This part offers theorical basis for the following discussion of relevant economies.The third part, research on the international practice of liquidity shock and assets price volatility. this paper does research on the representatives of the developed and developing countries separately. For one thing, analyzes the transmission mechanism of these contries by qualitative research. For another, test the transmission mechanism of these contries by empirical research.The fourth part, research on china’s practice of liquidity shock and assets price volatility. This paper focuses on the practice of liquidity shock and assets price volatility since the beginning of reform and opening-up, and sums up the characteristics of liquidity shocks and asset price volatility of China.The fifth part, the inspiration from the research on the theory and practice of liquidity shock and assets price volatility. Based on the analysis of theory and practice, this paper sums up the experience and lessons of liquidity shock and assets price volatility, and clearly puts forward that monetary policies should focus on the changes of assets’price, especially the changes of the main assets’price. The former answers the question’whether monetary policies need to focus on assets’price’, and the other give the answer to the question’what kind of asset should monetary policies focus on’. According to the empirical results of representative economies and the real situation of china, this paper proposes that it is obvious that the real estate has more and more main asset’s characteristics. This paper also puts forward the corresponding suggestions for the exchange rate system arrangement, financial innovation, and financial regulation of china.