Liquidity Characteristics, Implicit Information of Asset Prices and Monetary Policy in China

Xiao Weiguo (), Zhao Yang () and Yuan Wei ()
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Xiao Weiguo: Economic and Management School of Wuhan University.
Zhao Yang: Wuhan Branch of the People’s Bank of China.
Yuan Wei: Economic and Management School of Wuhan University, Luojiashan, Wuhan, China.

Journal for Economic Forecasting, 2013, issue 4, 56-66

Abstract: This paper empirically analyzes the liquidity characteristics of asset price boom-busts and the implicit information of asset prices in China during the period 1998-2011. The results indicate that liquidity plays an important role in asset price cycles and asset prices contain specific information of future output and inflation. Housing price booms are more consistent with credit expansion than stock price. Likewise, housing price has stable positive connection with future output gap and inflation relative to stock price. Based on the above results, the Chinese monetary policy should intervene in asset prices misalignment when in need, even targeting at housing price as conditions permit. Besides, credit control should be adopted to restrain housing price effectively.

Keywords: liquidity characteristics; asset prices; monetary policy; COBS approach (search for similar items in EconPapers)
JEL-codes: E21 E42 E52 (search for similar items in EconPapers)
Date: 2013
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