Asset Prices' Influence On Monetary Policy

Since the seventies last century, the global capital markets have intensely fluctuated. Asset prices, especially for stock prices and property price, have intensely fluctuated. The situation that burst of asset prices bubble will have severe impact on the macroeconomic system often occurred, such as the global financial crisis in 2008 triggered by the United States sub-prime mortgage crisis.With the development of capital markets and the proportion of household assets in total wealth increasing year by year, asset prices will affect consumption, investment and ultimately affect GDP of one country through various channels. Because asset markets have become an important channel through which monetary policy plays roles. Therefore, whether the Chinese monetary policy should take the changes of asset prices into account and then adjust in time has become the focus of academic discussion. This paper answers the question whether the central bank should take asset prices into account by empirical analysis, using quarterly data from the first quarter of 1996 to the first quarter of 2010.In this paper, Section 1 is an introduction of the background, the review of the research home and abroad, the frame structure and innovation and inadequacies of this paper. Section 2 is about the relative theory of asset prices volatility and monetary policy. Section 3 describes the theory of monetary policy rules, mainly focusing on the origin of the Taylor Rule and its basic model. Section 4 is about the estimation of expected inflation rate.Section 5 is the empirical analysis. Section 6 is the conclusions and policy recommendations.In this paper, we selected 57 samples, from the first quarter of 1996 to the first quarter of 2010, to do empirical study, and the selected indicators are:Inflation rate, expected inflation rate which is estimated by State-space model, output gap, the nominal interest rate, equilibrium real interest, the year growth rate of real estate prices and stock price. We respectively empirically analyzed the extension of Phillips curve, the IS curve contained the asset prices and the interest reaction model, by using GMM estimation, based on the extended Taylor rule. Then we conclude that:In China, the "barometer" role that stock market plays in national economy is not strong during the sample period, the development of the real estate market not only did not play the role of the wealth effect, however, it reduced consumption and eventually do harm to the real economy. Both stock and real estate prices are positively correlated to interest rates. As can be seen, the central bank should take the asset prices factors into account when setting monetary policy.The innovation of this paper are:We estimate expected inflation rate by State-space model, then we do empirical analysis to the expansion of the IS-Phillips curve and the reaction model of the interest rate, using the GMM estimation, and we also study both the reaction models of the interest rate that have contained the asset prices factors and have not contained, some valuable conclusions are obtained at last.The inadequacy of this paper are:Firstly, at the relevant literature aspect, although I try to read the widest range of domestic and foreign research results, it is difficult grasp relative knowledge completely and systematically; In addition, we only take stock prices and real estate asset prices into account in this paper, while such as exchange rate and other financial derivatives also have an important impact on the monetary policy. So we can attempt to contain those factors in follow-up study. Thirdly, this paper used HP filter method to estimate the output gap while there are a variety of methods. So we can try to use other methods. Finally, the model analysis remains to be done, and the selection of each variable remains to be more trials.