Research On The Impact Of Asset Prices On Macro Economy In China And The Effectiveness Of Monetary Policy

Since1970s, financial crises have occurred frequently although the rate of inflation is nothigh. Every time the crisis occurred, most of the monetary authorities will take the easingmonetary policy to stimulate economic recovery, however, the effect of easing monetary policyafter the subprime crisis is not good. Some scholars start to doubt whether the western monetarypolicy framework works effectively. Whether incorporating asset prices fluctuations in monetarypolicy considerations, has recently been the focus of policy makers and scholars.In order to find out whether in China monetary authorities should incorporate asset pricewhen making monetary policy, this paper researches into the macroeconomic effects of assetprice firstly. That is because only when asset price fluctuations will influent the stable growth ofmacro economy significantly, should asset price be incorporated when making monetary policy.The major innovation of this paper is considering the background of significant changehappened in asset market when studying the macroeconomic effect of asset price. In order to findout whether the impact of asset price on macro economy becomes more significant, this paperchooses December2004as the cut-off point to make a comparison study. The empirical resultshows that in China asset market becomes more market-oriented, the influence of asset price onmacro economy becomes more significant.Therefore, when asset price fluctuates greatly, it is necessary to manage asset pricefluctuations, but which tools to utilize remains to be studied. Some scholars think monetarypolicy is effective to manage asset price fluctuations. So this paper builds SVAR model toanalyze the impact of monetary on asset price. The empirical results show that monetary policyis effective in managing stock price and house price. What’s more, monetary policy is moreeffective in managing stock price when stock price increases. But due to the extensive andprofound influence of monetary policy on the macro economy, in China monetary authoritiesshould consider the cost-effectiveness before taking monetary policy tools to respond to the assetprices fluctuations.