Chinese Monetary Transmission Mechanism

The concerning about the relationship between asset prices and monetary policy is more and more heat. That is not only because as a transmitted channel,asset prices can transmit the monetary information,but also the fluctuation of asset prices have influenced the making of monetary policy and the realization of the monetary policy maker’s ultimate goals. This paper chooses the house prices as a representative of asset prices to research how important role it plays in the Monetary Transmission Mechanism (MTM). Different from other researches in this area, I mainly concern the negative effect of house prices in monetary transmission. According to Chinese house prices’figure during January, 2003-November,2010, it was proved that the house prices experienced the irrational growth.Firstly, I briefly introduce the theory about MTM. It is the process that monetary policy makers use some monetary instruments to realize their ultimate goals, like full employment, economic growth, price stability, and balance of payment. Secondly, I classify the different views of MTM. Then choose the outline which could best introduce the effect of asset price in MTM to analyze the role of house prices in this process. In theory, monetary policy can influence the house prices by direct interest rate effects and indirect effect of expected appreciation of house prices. Then high house prices encourage household to consume, as the high prices not only have standard wealth effect, but also loose the restriction of household credit through the balance sheet effect. At the same time, house prices can stimulate the enterprises to invest by the Tobin’s Q effect, and enterprise’s balance sheet effect. Thirdly, I collect the figures of the Chinese house market and information about the change of monetary policy from 1998. According to these materials, I choose the period from January,2003 to November,2010 to do the empirical analysis. Fourthly, I use the Granger casualty test, Variance composition and Impulse response in VAR model to test the effect of house prices in Chinese MTM. The empirical result show the monetary policy and house prices do not Granger cause each other, house prices does not Granger cause consumption, investment, and vice versa. But CPI index Granger cause monetary policy. The results of Variance composition show that monetary policy and house prices, house prices and consumption, investment, can not explain each other to some extent, the results of Impulse response show that with one standard deviation shock from the M2, the house prices increase first, and keep positive, then decrease into negative; With one standard deviation shock from the mortgage rate, the house prices always keep negative, but the extent of response from the mortgage rate is smaller than the shock from the M2. With one standard deviation shock from the house prices, the consumption change from positive to negative alternately, and the investment increase positive first, then decrease into negative.All results of the empirical test show that during January,2003-November, 2010, the house prices did not play as much important role in practice as in theory. Even too high house prices do damage in MTM. I give some explanations by some figures and facts.Finally, I suggest monetary policy makers should take high house prices into consideration, take measures such as making stress testing, cooperating with financial supervision, and publishing the financial stability report and so on.; At the same time, compile the index like FCI which take the house prices and other asset prices into consideration to anticipate the inflation more accurately rather than pay attention to CPI only; Last but not at least alter to the situation that house prices turn down abruptly, which do huge damage to MTM and financial stability.