The Influnences Of Stock Price’s Volatility To Monetary Policy

The paper analyzes the impact of stock price’s volatility to monetary policy. Theview is that the central bank should consider the volatility of stock price, and interferein the stock market when necessary. The paper introduces backgrounds and why thistopic was chosen. The paper analyzes the impact of stock price’s volatility toconsumption, investment, output and inflation. Data shows that the volatility of stockprice has influenced the consumption, investment and output. This paper examinessituations in U.S., U.K., France, Germany, Canada, Australia, Japan, Korea, Brazil,Russia, India, China South Africa during the period of2003-2008, finding thatcountries that have more volatile stock market have more volatile economy. The paperanalyzes how the central bank responds to the volatility of stock price. When thestock price is unreasonably high, central bank used deposit reserve policy and depositand loan fund rate policy to cool the stock market. When the stock price isunreasonably low, central bank used deposit reserve policy and deposit and loan fundrate policy to increase the stock price. Money supply is also an evidence to prove thatmonetary policy did consider the volatility of stock price. The paper discussed thecharacteristics of Chinese monetary policy. And the stock market of China is not veryefficient. It is needed to be taken care by the central bank. Through econometricanalysis, the paper found that nominal interest is related to the stock price volatility.This proves that central bank did consider the volatility of stock price. Finally,conclusion is made and some advices are given. As for the stock market, it needsmuch more development. As for the monetary policy, central bank should improve itsefficiency and make monetary policy carefully.