Study On Relationship Between China's Asset Price And Inflation

In the past 30 years, when the developed counties have maintained ultimate macroeconomic goals of price stability, low inflation and economic growth, the volatile asset price (mainly stock price and real estate price) has impacted on the economies all over the world time and time again, which led to growing scales of financial crisis and even economic crisis. That has been paid more attention by economists and monetary authorities who have summed up as the two main issues: one is how asset price have a influence on inflation,and the other is whether monetary authorities need take measures as a reaction to fluctuation of asset price and how they should do.In order for intensive analysis of the two issues, this paper focuses on the relationship between volatility of asset price and inflation and attempts to find more information about future inflation from fluctuation of asset price. At first, this paper gives detailed analysis on the mechanism of how asset price influence the inflation; secondly, under the help of foreign FCI research and the monetary policies in China, it has an attempt to establish the "financial conditions index FCI" in China with the VAR model including real money supply, real short-term interest rates, real effective exchange rate, real estate price and real stock index; and then it gives an examination of forecasting the future CPI by using the FCI, which especially focuses on effects of real estate price and stock price to inflation under the frame of FCI constructed by this paper. In conclusion, asset price has significant influence on inflation in China, and the real estimate price can have a better prediction for future inflation than stock index, and FCI can be used as a leading indicator for predicting future inflation,and it has the largest intertemporal dynamic correlation between CPI and FCI lagged two quarters.This study is of great theoretical and practical significance and can provide a theoretical basis and policy guideline for monetary authorities to develop and implement effective monetary macro-control policies so as to promote rapid development of the theories of monetary policy.