The Research Of Effects Of Monetary Policy By Studying The Stock Market Channel

Although China's stock market has a history only 17 years, it plays a important role in China's economy. On the first, it provides a place for enterprises to get money, on the second it also reflect the government's attitude to the real economy. For example, in 2004 when the government tightened macro-control on the heating economy, then the stock index failed rapidly. But on the other side, as a channel to transmit the macro-policy, it seems not very efficient. In 1995 after China's economy easing up, the central bank reduced the rate several times aimed at stimulating the economy. But the stock market did not react to this positively, and so did the real economy. All of these things make we think about how the monetary policy plays a role in stock market and how the stock market works on real economy. Some researches on stock market's wealth effect and investment effect say that in a long term stock price plays a role at consume although this effect is not evidently. Because most of these authors do they researches used the data before 2005, they may got a wrong conclusion considering the stock market's long bear market. Besides, there are not enough researches on how monetary policy operates on stock prices.With the fast growing up of China's stock market, it plays a more and more important role in our economic lives. China's stock market's amount had catch up with China's GDP on 9th of august this year. On a setup like this, it seems very important that how we perceive the relation between monetary policy and stock market. This essay researches on the different responses of stock market when we use different monetary instrument to influence the economy by using VECM tests,granger causality tests and variance decomposition. In order to make the conclusion more reliable we select the data between 1996 and 2007. By doing that we can get a whole bear and bull markets and a whole economic cycle, and we now get a reliable result. Our result indicates that money supply has a evident impact on the stock price whenever in the long term or in the short term, while the effect of adjusting rates lies on the investors'anticipation. Besides, the change of stock price does not have evident effect on investment and consume, especially consume. According to these conclusions, we can say that the central bank does not put much attention to the sock market is appropriate.