Abstract
We examine the different effects of monetary policy actions and central bank communication on China’s stock market bubbles with a Time-varying Parameter SVAR model. We find that with negative responses of fundamental component and positive responses of bubble component of asset prices, contractionary monetary policy induces the observed stock prices to rise during periods of large bubbles. By contrast, central bank communication acts on the market through expectation guidance and has more significant effects on stock prices in the long run, which implies that central bank communication be used as an effective long-term instrument for the central bank’s policymaking.
Highlights
The 2008 financial crisis and the high volatility of China’s stock market in recent years highlight the importance of financial stability
We try to tackle the problems of whether monetary policy should react to asset price bubbles in China and what instrument is more efficient in doing this by analyzing different effects of conventional and unconventional monetary policy on asset prices using
It is worth mentioning that central bank communication has not been widely used by the PBOC until the year of 2003, since when the relative data is available
Summary
The 2008 financial crisis and the high volatility of China’s stock market in recent years highlight the importance of financial stability. There have been limited studies on how different kinds of monetary policy instruments should react to it. The emergence of unconventional monetary policy has caused widespread concern among academia and industry, bringing the comparison of conventional and unconventional monetary policy on the table. Previous studies mention that transmission efficiency of conventional monetary policy is lower in developing than in developed countries because of the financial market incompleteness. We try to tackle the problems of whether monetary policy should react to asset price bubbles in China and what instrument is more efficient in doing this by analyzing different effects of conventional and unconventional monetary policy on asset prices using
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