The Response Of China 's Monetary Policy And Stock Market Price

Rencently, with China’s process of the interest rates liberalization reform, how to optimize the interest rate to maintain monetary stability and stimulate the macroeconomic development is the most essential issue in the monetary policy formulation.The subprime mortgage crisis caused by asset price volatility and the increasing size of China’s capital market aroused wide and deep debates in academic and monetary authorities that whether monetary policy should respond to asset prices rather than only stabilizing the currency and promoting sustainable economic development.This dissertation, based on the traditional Taylor rule, summarizes academic research acievement concerning the relationship between the Taylor rule and asset price, introduces the stock price fluctuations factor to extend the Taylor rule and empirically studies the reaction of China’s monetary policy on stock market price. Based on the quarterly data from2000to2012, it examines the application of static Taylor rule, forward-looking staticTaylor rule, dynamic Taylor rule and forward-looking dynamic Taylor rule on stock price.The result shows that china’s monetary policy is an unstable rule. In such an unstable monetary policy regime, the generation and development of inflation or deflation is of a self-fulfilling mechanism. It also shows that China’s monetary policy has interest rate smoothing behavior with a gradual interest rate adjustment, however forward-looking characteristics are not significant in policy, the effect on expected inflation on china’s monetary policy is limited. The asset price fluctuation is not a significant influening factor for interest rate determination in China for its insensitivity.Taylor rule is limited in specific implementation due to China’s exchange rate system, controlled interest rates, the status of the People’s Bank and nonmarket-based stock market. Chinese monetary authorities should improve policy adjustment to inflation and GDP gap, enhance policy foresight, pertinence and flexibility and achieve market-oriented operation of the stock market with openness and fairness. Interest rate market-oriented reforms should be steadily processing to improve the transmission mechanism of monetary policy, the rational allocation of financial resources, and the sustainable development of China’s economy.