The Study On Asset Price Bubbles And Monetary Policy

This dissertation mainly discusses the response of monetary policies to asset price bubbles. Conventional monetary theories deem that low inflation can completely ensure the sustainable economic growth and can effectively smooth the fluctuation of the economy cycle. However if the central bank focuses on prices of commodities blindly and ignore the volatility of assets prices, economy will face great risks. In the past 20 years, the stability of the relationship of prices and output has not presented the stability of assets prices. On the contrary, the assets price have experienced drastic volatility for the past 20 years, In other words, low inflation can not ensure financial stability and the instability of finance certainly will result in the turbulence of real and economy.The volatility of assets prices have directly effects on real economic behaviors. Assets prices contain the information of economic running with which policy authorities can improve the stability of macro economy .We should take the problem of asset price bubble into account during the process of making monetary policy not only because they will influence expected inflation but also the occurrence and the collapse of such asset price bubble will induce large-scale economic fluctuation. So the response of monetary policy to asset price bubble should be able to promote the stability and health of macro economy.In order to study the problem of the response of monetary policy to asset price bubbles, we must learn how to recognize asset price bubbles. It is very difficult to recognize asset price bubbles and to distinguish them from the rise of asset prices caused by the permanent improvements of factors of basic facet. However, it does not mean that we can not recognize and measure these bubbles. We can recognize these bubbles by two means: the first one is to ascertain bubbles according to the long-term trend of changes of stock prices; the second one is to estimate proper stock prices according to Gordon's dividend equation in which the historical data are input, with method of modeling of econometrics.This dissertation studies the relationship between monetary policies and asset price bubbles in theory. Mainly focuses on the following three mechanisms and the interaction among them: asset price bubbles caused by the irrational exuberance of investors; asset price bubbles resulted from investors pursuing risky yield because of the weakness of financial intermediaries; asset price bubbles caused by moral hazardinduced by central banks attention financial stability. Therefore this dissertation designs a model which is focusing on the relationship among financial frangibility, capital market and monetary policies. The conclusion of this models analysis shows that central bank focusing on the collapse cost results in asymmetry response, which leads asset price bubble to emerge.Since the monetary policy of input liquidity would induce the problem of asset price bubbles, this dissertation introduces the standard Taylor's rule to help with the study. However, the model of standard Taylor's rule does not directly take the capital market into account, so this dissertation expand the connotation of Taylor's rule and takes linear conditions of the target of capital market into account. In fact, the relationships among asset prices, financial stability and monetary policies are very complicated, which are constitutionally non-linear, therefore, this dissertation designs a model which shows the response of non-linear Taylor's rule to asset price bubbles, based on new Keynesian models. This model indicates that today's monetary policy maker's consensus when facing to asset price bubbles is to follow a reactive monetary policy, which is supposed to be used to cope with the kickbacks resulted from the breakdown of asset prices. Apparently, the reactive monetary policies will result in much more output loss than the proactive monetary policies which bring asset prices into central bank's target functions.At last this dissertation discuss the problem of response of china's monetary policy to asset price bubbles, analyses and evaluate the historic situation of China's asset price bubbles around the year of 2001, then it carries out an empirical test in detail on that whether China's monetary authority responded the bubbles of stock price with econometrics tools by using static and dynamic Taylor's rule. The conclusion is that the regression result of both the dynamic and the static specification indicate that China's monetary policy is instable policy rule and interest rate is negative correlation with stock overluation. A basic conclusion is that we should correctly understand the information contained in asset price which monetary policies should make a proper response according to.