The Correlation Effect Of Monetary Policy And The Stock Market

Since the1980s, the relationship between monetary policy and stock market have become an increasing concern of academics. Throughout the history of domestic and foreign, the burst of many large "bubble economy" were associated with stock market volatility, especially after the1980s, accompanied by the frequent occurrence of the financial crisis, the relationship between monetary policy and stock market is more outstanding.The stock market has become an important factor in the measure of economic stability, and gets the attention of the monetary policy-makers.Now, the number of China’s listed companies is increasing and the scale of the stock market expand, so the role of stock market is a more prominent in our economy. Asset price represented by the stock fluctuations tend to make China’s economy faced with greater challenges, the changes in asset prices increasingly impact on the entire economic and social stability, that set a higher challenge for the central bank to formulate monetary policy. In the practice of monetary policy operations, whether need to focus on capital market development, concerned about the changes in asset prices, that is the problems to be solved by monetary policy makers in today’s economic conditions. The rapid development of capital markets, the increased capacity of the stock market allocation of resources,and the increasingly close relationship between monetary policy and the stock market, in recent years,the study of the correlation effect of monetary policy and the stock market has very important significance.This paper is based on the target variable of monetary policy and stock index as the main variables. Paper conduct theoretical analysis and empirical research based on the existing theory and literature. In empirical research mainly use structural vector autoregression(SVAR) conduct impulse response analysis and variance decomposition analysis.This paper researchs the correlation effect of monetary policy and stock market consisting of five parts. The first part is the introduction, expounds the background and significance of this study firstly, then the ideas and logical structure are provided, as well as the methods used in this paper and the innovation,the deficiency are also pointed out.The second part is the related theory and literatures review, this is an essential part, for the next study reference.Firstly, introduces the theory of monetary policy transmission, Secondly, introduces theory of the monetary policy transmission channels. Finally, make a literature review on the relationship of each order of the monetary policy objectives and the stock market.The third part is a theoretical analysis of the monetary policy impact on the stock market, this part focus on the direct impaction of each of the target variable on the stock market. The expected effects analysis of the impaction of monetary policy on the stock market, provides a comparison standard for the behind empirical test.The fourth part is the empirical test and quantitative analysis of the associated effects of monetary policy and stock market,This part uses the monthly data from1999to2011for the entire time empirical research and the phased empirical study which uses2005as the cut-off point.The last section are conclusions and policy recommendations.First, this chapter summarizes the findings of the full text on the basis of the front empirical and theoretical analysis.They are,(ⅰ)From the overall time period:our country’s monetary policy can have an impact on the stock market mainly through three ways of money supply, inflation and bank credit;(ⅱ)The impact of stock market changes on the output of the ultimate goal of monetary policy is more obvious than on inflation;(ⅲ)The effectiveness of monetary policy to the stock market conduction had been greatly improved after2005the share reform and exchange rate reform;(ⅳ)After2005the stock reform and exchange rate reform, the impact of stock market on the ultimate goal of monetary policy significantly enhanced.The pathways from stock marke to monetary policy had be strengthened.Then,The relevant policy recommendations based on the conclusions are put forward.These mainly include:(ⅰ)Central bank can consider the stock price into the range of consideration when set monetary policy;(ⅱ)Speed up the process of interest rates iberalization;(ⅲ)Continue to perfect our country’s stock market;(ⅳ)Speed up the reform of RMB exchange rate formation mechanism;(ⅴ)Improve the credit system reform of our country.In summary,The results show that the association effect of our country’s monetary policy and stock market have been Increasingly close.Stock market is an increasingly important role in monetary policy and China’s economic.our country should continue to deepen market reforms at all levels associated with monetary policy to make monetary policy transmission efficiency further improved.The contributions of this paper are mainly the following aspects:(ⅰ)From a research perspective, this article highlights the importance impact of the2005stock reform and exchange rate reform on monetary policy and stock market relationship;(ⅱ)The research methods,this paper uses the relatively advanced approach structural vector Autoregression (SVAR) of empirical research, and uses the impulse response and variance decomposition analysis;(ⅲ)The study variables,this article combines with the actual characteristics of China’s economic system, and the size of the credit is also added to the model;(ⅳ)The main conclusions,this paper makes a preliminary attempt on specific operations of referencing the stock market in the central bank setting monetary policy.