The Impact Of Monetary Policy On Asset Prices Under Open Conditions

Traditionally, the main area of monetary policy is about the real economy. Through the process of controlling the quantity of money which impact on overall demands and overall supply, monetary policy could transmit to the real economy directly. Therefore, from the past experience, it is not necessary to form a connection between the variation of monetary policy and price establishment in financial market.However, in the 1990s, many countries in the world began to lose financial controlling and global capital market started to develop rapidly. Under this circumstance, monetary policy resulted in the changing price of financial assets, as well as behavior of financial market participants. In this way, monetary policy successfully passed on its intention. The interactive between monetary policy and financial assets prices has drawn much attention from economists, especially since the global financial crisis in 2007. With spreading out of the US. Subprime crisis (2008) and European sovereign debt crisis (2012), global financial market has fluctuated sharply, which significantly exceed the speed of movement in the real economy at the same period of time. Much more financial assets become lacking of liquidity as a result of fluctuation in global financial market. An increasing number of financial institutions have been asked to drive down assets. On the other hand, losing liquidity of financial assets has obstructed the governments'resume schedule to a great extend, exacerbating the operation of the real economy.The main concerning in theory is about relationship between monetary policy and financial asset price. The primary topic is whether or not monetary policy could react to the movement in financial asset price and how to react.Another aspect in this relationship is about what kind of influence on financial asset price that changing monetary policy conducts and how to improve this influence in order to form a favorable mutual interaction. The article goes from this point, talking about the effects of monetary policy on the prices of different kinds of financial assets, like stock and bond, since the opening up in Chinese financial market.There are two practical questions need to be considered. The first one is whether or not that financial asset price could react to monetary policy variation, which means whether or not that financial assets price could transmit monetary policy intention effectively. Secondly, there needs some necessary conditions in financial market in order to react effectively, so the question is whether or not these conditions in an economic system truly exist or being mature and how to improve them.This article analyzes the influencing degree and roles of monetary policies from 2002 on the financial assets price, from both quality and quantity perspectives. It mainly explains the impacts of three kinds of monetary policy instruments on stock market, money market and long-term debt market and gets some basic conclusions:1. liquidity is the main factor impacting financial asset price. However, liquidity influence is determined by opening up degree of financial market; 2. There are different influence degrees for the different level of liquidity.3. Although our interest rate policy and stock market movement have long-term co-integration, it is not obvious in the short term. On the contrary, interest rate policy affects debt market in another way.4. The effects of reserve requirements on deposits and open market operation are quite little.5. It is not sensitive for the influence of monetary policy, which is highly related with our financial ecological environment.On the base of above conclusions, this article further interprets the related elements between monetary policy and asset price and provides political suggestions on strength their inter-relationship:1. accelerating the development of interest rate market; 2. intensifying the transparency of money market; 3. commercializing exchange rate market, getting rid of interference of unbalanced exchange rate level on liquidity; 4. enlarging financial compositions to form a substitution relationship between financial assets; 5. establishing an efficient inter-connection way in financial market.This article is structured as following:The first part is introduction, focusing on research background, research value and methods.The second part is literature review. The first aspect goes to related theories from the macro-financial perspective. The second aspect explains the key factors determining different financial assets prices on the base of micro-financial-pricing theory. After that, the monetary political factors in financial asset pricing structure will be given.The third part illustrates the transmitting channels and logicality inside the relationship between monetary policy and financial assets price. Liquidity serves as a function of bridge. Under this circumstance, this article separates different liquidity levels of financial assets prices and isolates different factors for different liquidity levels in stock market, money market and long-term bond market.The forth part discusses the degree of influence of monetary policy on financial asset price, under the condition of financial market opening up. Based on the eternal triangle, it explains the probability of distortion upon financial asset price under opening up conditions. And also investigates the different influences in different stages of financial opening up process in a way of case study.The fifth part further analyzes the influence degree and meanings of changing of monetary policies on stock market since the last decade from both theoretical and practical perspectives, taken interest rate policies and reserve requirements as examples.The next part explains different effects of diverse kinds of monetary policy tools, starting from money market and long-term debt market in both theoretical and practical aspects. Apart from that, it describes both long-run and short-run logic transitions and influence degrees inside relationship between monetary policy and debt market in a quantity method.The last part focuses on the system establishment. Firstly, it summarizes the mutual-influence between monetary policy and financial asset price and different influence degree under different opening up conditions and comes up the key determination factors. With this as a starting point, it offers several political suggestions regarding to the relationship between monetary policy and financial asset price.