The Influence Of RMB Exchange Reform Of The Impact Of Monetary Policy On Stock Market

These years the stock market in China has become more and more important to our social and economic development. From previous studies we can see that the situation of "excess liquidity pushes up asset prices" is very serious in China. So it is meaningless to study the correlation between stock prices and monetary liquidity because the monetary policy is out of control. In order to create the meaningful academic environment we divide the research time series into two parts in term of the time of the RMB exchange regime reform, which can bring the independence and effectiveness to the monetary policy. Through the empirical and theory analysis we find that People’s Bank of China can hardly influence the stock market through the monetary policy before the RMB exchange regime reform, which is mainly caused by the huge foreign exchange reserves. Pleasingly we find that after the reform the monetary base has gradually affected M1 and the transformation from time deposits to demand deposits has become the most important indicator which can influence the fluctuation in stock market. At the same time the RMB exchange regime reform has attracted huge amount of international hot money into our capital market, which brought new challenges to the independence of our monetary policy. According to the new situation after the reform we suggest several policy recommendations in order that our central bank can control the stock market more independently and effectively to avoid the outbreak of financial crisis in China. This paper is mainly formed by five parts; main views and content are as follows:In chapter 1 we introduce the Literature Review on how the monetary policy influences the stock market. At first we can see that most western scholars focused on the incidental shock of monetary policy to stock market, which was based on the full interest rate marketization in western countries. On the contrary the Chinese researchers put their effort to search the correlation between the money supply and the stock prices because the interest rate in China is strictly controlled by the central government. In general many research results in China are not meaningful to real life owing to the lack of independent monetary policy.In chapter 2 we explain why we dived the research time into two parts according to the exchange reform in China. Then we give a clear description of empirical models including Vector Auto-regression model, Granger causality test, co-integration test, impulse response function, variance decomposition.In chapter 3 and chapter 4 we discuss how the independence and the effectiveness of the monetary policy changes after the exchange regime reform. We find that the exchange reform is helpful to revive the independence of the monetary policy to some extent. The central bank can influence the stock market through the money multiplier effect and MZS-the index which indicates the transform speed from time deposits to demand deposits has become the most influential monetary factor to affect the stock market.Finally we give our policy suggestion to help the monetary policy maker to control the stock market more independently and effectively in chapter 5. Mostly we focus on the further reform of the exchange regime to bring a bright future to the independent and effective monetary policy.