Impact of Asset Price Fluctuation on China’s Monetary Policy: An Empirical Analysis Based on Quarterly Data, 1994–2006

Jinwen Zhao () and Hui Gao ()
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Jinwen Zhao: School of Finance, Dongbei University of Finance and Economics, Dalian 116025, China
Hui Gao: School of Statistics, Dongbei University of Finance and Economics, Dalian 116025, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2010, vol. 5, issue 1, 69-95

Abstract: The strenuous fluctuation in global asset price in recent years has had a profound impact on the economic and social development of every country. An empirical analysis indicates that asset prices (the stock price index and real estate prices) are important endogenous variables affecting the interest rate reaction function of central bank monetary policy. With expected inflation as a given, each one percentage point rise in output gap will cause a 0.79 percentage point reduction in interest rates by the central bank and each one percentage point rise in real estate price will result in a 2.2 percentage point rise in interest rates. The stock price index does have an influence on the trends in monetary policy, but it is less salient than the impact of housing prices. We also show that monetary policy that employs asset price as an endogenous variable increases the central bank’s control in seeking to attain its objectives. Therefore we suggest that the central bank should make asset price fluctuation an endogenous variable and incorporate it into its forward-looking interest rate rule, in order to facilitate the healthy development of China’s markets for real estate, stocks and derivatives, energy and bulk commodities and maintain rapid, smooth, sustainable and harmonious economic development

Keywords: asset prices fluctuation; monetary policy; interest rate rule; Extended IS curve; Cointegration Test (search for similar items in EconPapers)
JEL-codes: C51 E52 E63 (search for similar items in EconPapers)
Date: 2010
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