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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2010, Vol. 5 Issue (1) : 69-95
Research articles |
Impact of Asset Price Fluctuation on China’s Monetary Policy: An Empirical Analysis Based on Quarterly Data, 1994–2006
Jinwen Zhao1, Hui Gao 2,
1.School of Finance, Dongbei University of Finance and Economics, Dalian 116025, China; 2.School of Statistics, Dongbei University of Finance and Economics, Dalian 116025, China;
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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      
Issue Date: 05 March 2010
 Cite this article:   
Jinwen Zhao,Hui Gao. Impact of Asset Price Fluctuation on China’s Monetary Policy: An Empirical Analysis Based on Quarterly Data, 1994–2006[J]. Front. Econ. China, 2010, 5(1): 69-95.
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