A Responding Mechanism To Changes Of Assert Price Under Inflation Targeting

Inflation targeting was introduced in New Zealand in1989and hassince been more and more popular around the world. Actually, inflationtargeting countries have successfully reduced the level of inflation toachieve price stability. However, under the relative stable situation of rate、price and domestic economy,many countrys began to appear thephenomenon that the asset price fluctuate severely. The volatility of assetprices has an impact not only on the Central Bank’s price stability target,more systemic financial risks, such as, credit crunch banking crisis. Centralbanks face difficulties. More and more attention of theorists and monetaryauthorities pay attention to these. The content is as follows.This article studies the characteristics of such a policy framework ofinflation targeting and the policy effect. Inflation targeting is a monetarypolicy policy practice, there is no standard theory is basically the same, butthe same institutional framework. Inflation targeting stabilizes prices as a primary objective as the primary goal. Although this does not mean that thecentral bank is only concerned with price stability, but only if the otherobjectives without conflict with the inflation target, the central bank willpursue other goals.This article has proved correlation of asset prices and monetary policyin the aspects of theoretical and empirical perspective. Generally speaking,monetary policy can act directly on asset prices. On the contrary, asset pricefluctuation will impact the ultimate goal of monetary policy.monetary. Inthe empirical study, I take advantage of our country’s data and VAR modelto prove relationship between monetary policy and asset price’s fluctuation.Stock price is as an indicator of the inflation rate; and presence of a weakpositive correlation with fluctuations in output.On the basis of above studies, the thesis analysis of inflation targetingcentral banks respond to asset price fluctuation of policy options and comesup with the reasonable suggestions on how to deal with asset pricesfluctuation. The central bank, while maintaining price stability, asset priceshave emerged wide fluctuations, which it will put price stability and economic growth (full employment) goals have a negative effect, leads thecentral bank having the difficultiy central bank to achieve two majorobjectives. In such a background, monetary policy can be considered amore flexible way to respond to changes in asset prices. In order to preventthe formation of serious asset price bubbles, we observed the changes ofassert prices by construction of a new inflation index and asset pricesincluded into monetary reaction function. When faced with asset pricevolatility, the central bank must controlle, even if it will cause temporarydeviation in output and inflation. After the bubble burst, monetary policymust be carried out a positive policy to rescue.