Monetary Liquidity And Its Influence On Asset Price

This paper analyzes and compares the notion and measurement of monetary liquidityin present literatures firstly, then chooses M2/GDP and M1/M2as the measure indexes ofmonetary liquidity finally. M2/GDP is a pertinent index which reflects demand and supplyof money compositely, and M1/M2stands for the cashability of money. Stock market andreal estate market are the two active asset markets in our country, and the impaction ofmonetary liquidity on these two markets has been attentioned widely. This paper choosesclosing price of SSE of the last exchange day every month as the price of stock market andreal estate climate index as the price of real estate, and the Granger causality test resultsshow that stock price and house price both have some causality with monetary liquidity.As most present literature have studied the relationship of monetary liquidity and assetprice with fixed parameter model, but the influence would change at different phase, thispaper will take time-varying model to study this topic. The empirical result shows thatmonetary liquidity could affect both stock market and real estate market, especially, realestate market has great causality with monetary liquidity. However, the causality frommonetary liquidity to stock market is complicated. Time-varying model result shows stockprice is more sensitive to monetary liquidity at the phase of economy’s fast growing thanat the phase of economy recession. Policy maker could validly manage monetary liquidityaccording to the relationship between asset price and monetary liquidity reflected by thispaper, which could be helpful to the healthy development of stock and real estate market.