The Impact Of Monetary Policy On The Stock Market In China

Abstract:Monetary policy as an important way of macroeconomic regulation and control plays an important role in our economic life. The three tools of monetary policy, such as open market operations, the deposit reserve policy and the rediscount policy are widely used by the monetary authorities. Since the stock market made a large effect in today’s economic development, the study of the relationship between monetary policy and the stock market has a profound and practical significance for the formulation of monetary policy and how to select the monetary policy tools.We first introduce the transmission mechanism of monetary policy, then study the effects of the main policy instrument of monetary policy on the stock market in China. We use money supply, deposit reserve ratio, industrial production index, consumer price index and producer price index to establish the monetary policy indicator system to study the impact of the monetary policy indicator system to Chinese stock index by adopting Chinese Shanghai Composite Index and Shenzhen Component Index as an intermediary indicator of Chinese stock market. We use the econometrics principle, the mainly used principle is structural vector autoregression model and impulse response function to do the empirical analysis for the stock market in China. The results show that the change in monetary policy will have an impact to Shanghai Composite Index and Shenzhen Component Index in the short term. In the long term, monetary policy only influence the Shanghai Composite Index. The deposits reserve ratio will have a sharp impact on the stock market. Therefore, it is recommended that the central bank need to be careful in the choice of the monetary policy tools of the deposit reserve.