Monetary Policy Transmission Mechanism Of Asset Prices In China

From the 1900s to now, in only 20 years time, several regional or even global financial crisis had occurred. In 2007, the impact and destructive power of global financial crisis caused by the U.S. supreme mortgage problems are beyond the imagination of all the people around the world. Though our country is not seriously affected by this financial crisis, from 21st century, our own assets prices, particularly several fierce fluctuations in the price of stocks and real estate have already affected the smooth functioning of the economy. It is in this environment, the research of asset prices and monetary policy has become a hot spot. This paper will mainly study the asset price transmission mechanism of China's monetary policy and seek to explore the intrinsic connection between monetary policy and asset prices. By analyzing the whole transmission channel, finding the common law and making recommendations, this paper is hoped to make some reasonable proposals to China's central policy so as to maintain the stable and rapid development of our country's economy.This paper made a serious and comprehensive summary of the asset price transmission mechanism theory. The transmission process is divided into two parts: the first part is the relationship between monetary policy and asset prices while the second part is the correlation between the asset prices volatility and economy. Then the two parts will be analyzed respectively. At first, from the perceptive of monetary policy tool, interest rate and credit level, the cause of asset prices volatility is stated. After that, this paper will introduce the theory of wealth effect, balance sheet and liquidity, which are the theoretical basis of asset prices conduction. On the basis of that, this paper will use China's latest economic data to establish a vector auto-regression model and apply methods such as co integration analysis, Granger causality and impulse response to do an empirical analysis of the whole transmission channels. The analysis proves:the modification of China's money supply will affect asset prices (including the prices of stock and real estate) while the changes in interest rates will lead to the changes in share prices. However, the channel of monetary policy transmission to real economy is existent but not smooth. In this section, only the changes in real estate can affect the output, and their impacts on inflation index are not huge, which is to say, the function of asset prices as an economic "indicator" has not been well represented.After the empirical analysis, this paper tries to monitor the fluctuations in asset prices-bring asset prices into our current price index. The results indicate that the new price index is more forward-looking to the economical operation. Then an original monetary policy tool named differential capital reserve is created to control the fierce fluctuation of asset prices. Some of my own recommendations to the policy are made in the end.