The Empirical Study Of The Reaction Of Stock Price Index To Monetary Policy

As an important part of China’s capital market, stock market has undergone severalbig fluctuations since its establishment. It develops amid twists and turns and with specialdisciplines. Meanwhile the mutual intermediation between stock market and currencymarket is gradually strengthening and an increasingly close relationship is cultivated. Thedevelopment of the stock market has a certain impact on the effectiveness of monetarypolicy and on the other side an effective way of conducting monetary policy is formed.What’s more, once the monetary policy is implemented, it will have an effect towards thestock price index. This paper focuses on the latter case. In other words, what effects will becaused by the implementation of the monetary policy on stock price index.At first, this paper make a brief introduction of relevant theory. Then a panel datamodel is established to analyze the effect of monetary policy on stock prices in major stockmarkets, such as UK stock market, American stock market, Japan’s stock market, HKstock market and Shanghai stock market. The intensity and direction of the impact ofmonetary policy on stock price index are analyzed. Next according to our country’s stockmarket’s particular conditions, more detailed analysis is made. Some methods and modelsare used to obtain the dynamic relationship between the monetary policy and stock priceindex, such as Vector Auto Regression model, Vector Error Correction model, impulseresponse function and variance decomposition. The impact brought by the implementationof monetary policy on stock price index is fully analyzed. According to the empiricalresults, compared with other mature stock markets the effect of monetary policy on stockmarket in our country is less forceful. Meanwhile, the money supply tools is more effectivethan interest rate instrument. But certain period of time does exist between theimplementation of the monetary policy and the point when it makes effect. Interest rateinstrument sometimes has a positive effect on the stock price index. But sometimes bringsnegative effect in short term. In the long run, the effect of interest rate can be completelydigested by the stock market. At last combined the empirical results with the condition of our country’s stock market, certain corresponding measures are proposed. Such as pushingforward the interest rate marketzation to improve the effectiveness of interest rateinstruments, perfecting the money supply policy tools to enhance its flexibility andforward-looking property, improving the construction of the stock market and so on.