The Validity Analysis Of Asset Price As One Target In Monetary Policy Control

For nearly three decades, especially from the 1990s, the main countries of the west which major in controlling price stability as monetary policy objectives have achieved good success, but accompanied by inflation has been effectively controlled , the asset prices begin increasing more volatility and induce financial imbalance and financial instability. As the kinds of financial derivative productions and the proportion of assets in resident's wealth increasing, it showed a growing impact on a country's real economy as asset price substantial increase volatility. Therefore, it is significant to study the relationship of China's monetary policy and asset prices. In this paper, we first analyzed the theory relationship between monetary policy and asset prices, and did a detail analysis on asset prices in monetary policy transmission mechanism, and thus having a clearer understanding on the mechanism of action between monetary policy and asset prices. Second, we used VAR and Factor Analysis method to construct the China's Condition Index (FCI) which contains the asset prices, and analyzed the index and the relationship between economic output and inflation. Finally, we include the financial condition index in the Taylor rule to examine China's monetary policy. Paper turns out main conclusions as follows: First, empirical analysis demonstrates the FCI index which constructed in this paper can lead Micro-economic changes in a certain extent, so it can play the role of indicator effect in macro-economic changes, relatively FCI1 index performed relative weak as an indicator in economic output , while FCI2 was performed more significant in inflation. Second, the weight of asset prices (especially real estate) in the financial conditions index is high (33%), the asset price volatility become one important part which reflect the changes of our country's financial environment, so it is necessary for the central bank to put the asset prices into monetary policy target. Third, the test results which include the FCI2 to the Taylor rule empirical shows that the interest rate has statistically significant positive correlation to financial condition index and inflation rate. The central bank had taken into account the factors of financial markets and asset prices implicitly when setting interesting rates.