Study On Relationships Between Volatility Of Asset Price And Inflation

Nowadays, the policy objectives taken by central banks among most countries vary a lot, but it comes to the consensus on the point of maintaining price stability. The central bank’s policy objectives all regard the inflation controlling as an important task at present. However, the volatility of asset price hit the national macroscopic economy repeatedly in recent years, and triggered the ever greater financial crisis,even the worldwide economic crisis, repeatedly. The American sub-loan crisis in2008eventually which spread to the global economic crisis is just a good example. To explore the intricate cause hidden behind the phenomenon, large number of scholars have launched a series of researches both at home and abroad, and one of the important reasons for the phenomenon can’t be ignored, that is to say, the internal logic relations between the volatility of asset price and inflation.Looking back the period of economic development in China, it also appeared the asymmetric paradox of the asset price and the price level. So we wondered if there is indeed a internal logical relationship between the huge fluctuations in asset prices and the general price level,and what the relationship between the expansion of the asset prices and inflation in China is in fact.Based on the actual situation of asset price fluctuations and inflation in China with this question,this paper tries to construct a comprehensive financial condition index FCI to explore the further relationship between them. It reviews the domestic and foreign papers on the relationship of asset price fluctuations and inflation first, however, about whether there is a stable relationship between the assets price fluctuations and inflation on the long-term and asset prices should be involved in the measurement system of inflation, are still not settled yet in the academic circles. Obviously, this is exactly the purpose of this study.This paper is conducted in theoretical and empirical approach. In the theoretical aspect, this article gives detailed analysis on the mechanism of how asset prices influence the inflation from the wealth effect, the Tobin Q effect and finance accelerating effect, and at the same time, it also concentrates on the analysis about mechanism of the inflation influences asset prices, taking house and stock prices for example, with the consideration of the house and stock prices waving most and having the greatest impact on the economy and life.It proved that there is indeed a inner logical relationship between asset prices and inflation in theory. In the empirical aspect, according to the three given methods to estimate the assets variable weights in the FCI by Goodhart and Hofmann,this paper chooses the VAR model and impulse response function method to construct a financial conditions index FCI specially for China,taking my own actual situation into consideration; in the study sample, it chooses the monthly data between January1999and April2013; and about the exact assets price variables included in FCI, this paper chooses the real interest rate, the real exchange rate, the real house prices and the real stock prices of all kinds of asset prices to build the VAR model, mainly according to Guo Ye. On the specific empirical method, this paper adopts the ADF Unit Root Test and Granger Causality Test, Vector Auto Regressive model to research the inner relationship between the rate of inflation and asset price volatility.The empirical results show that the weight of the stock price index and the real estate price index in the FCI is bigger, the real exchange rate is relatively less compared to house and stock prices, and the real interest rate is very small and almost negligible, showing the stock and house prices influence the inflation more in China,nowadays. Study also shows that, the FCI, on behalf of the China’s asset prices, is the leading indicator of CPI inflation rate, and also gives a good reference for the monetary policy in our country. Therefore, this paper concludes that the asset prices can affect inflation, especially, stock price has a better ability to predict inflation than the house price. And the introduction of asset prices can improve the ability of predicting the future inflation, but the measure of the asset prices into inflation still exists certain difficulties. Given the importance of the asset price inflation, monetary policy should pay more and closer attentions to asset prices, particularly the volatility of house prices and stock prices.Finally, the paper conducts the debate on the countermeasures of financial stability under the volatility of asset price, given to prevent asset foam and the related policy suggestion on inflation, combined with the conclusion of theoretical analysis and empirical analysis, according to the actual situation in China.Main innovation points of this paper is to study the double direction relationship between the volatility of asset price and inflation; and on the asset types and sample data selection, it has made the optimization and improvement compared to the previous domestic related research; on the expansion of the sample, it also included the latest data in2013.At the same time, in view of my limited academic level, in this paper, there are still many deficiencies and unresolved issues, and some data in the model do not have effective reasonable explanations. Since this sample contains a data range after the financial crisis in2008, compared with previous literature on FCI, the weight of each variable has obvious changes. To some extent, it reflects " dependence on model and the data" of the FCI weight. In addition, there is no further discussion and analysis about how the asset price fluctuations can be measured into the inflation in this paper, and this paper doesn’t take other factors that influence asset prices and inflation into account. These all can be the direction of further research in the future.