Advanced Search
MyIDEAS: Login to save this paper or follow this series

On China’s Monetary Policy and Asset Prices

Contents:

Author Info

  • Shujie Yao
  • Dan Luo
  • Lixia Loh
Registered author(s):

    Abstract

    This paper investigates the dynamic and long-run relationships between monetary policy and asset prices in China using monthly data from June 2005 to September 2010. Johansen’s cointegration approach based on vector autoregression (VAR) and Granger causality test are used to identify the long-run relationships and directions of causality between asset prices and monetary variables. Empirical results show that monetary policies have little immediate effect on asset prices, suggesting that Chinese investors may be ‘irrational’ and ‘speculative’. Instead of running away from the market, investors rush to buy houses or shares whenever tightening monetary actions are taken. Such seemingly irrational and speculative behavior can be explained by various social and economic factors, including lack of investment channels, market imperfections, cultural traditions, urbanization and demographic changes. The results have two important policy implications. First, China’s central bank has not used and should not use interest rate alone to maintain macro-economic stability. Second, both monetary and non-monetary policies should be deployed when asset bubbles loom large to avoid devastating consequences when they burst.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nottingham.ac.uk/gep/documents/papers/2011/11-04.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by University of Nottingham, GEP in its series Discussion Papers with number 11/04.

    as in new window
    Length:
    Date of creation:
    Date of revision:
    Handle: RePEc:not:notgep:11/04

    Contact details of provider:
    Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
    Phone: (44) 0115 951 5620
    Fax: (0115) 951 4159
    Web page: http://www.nottingham.ac.uk/gep/index.aspx
    More information through EDIRC

    Related research

    Keywords: Monetary policy; Asset prices; Interest rates; Bank reserve ratio; China;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. John Taylor, 2007. "Housing and Monetary Policy," Discussion Papers, Stanford Institute for Economic Policy Research 07-003, Stanford Institute for Economic Policy Research.
    2. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(8), pages 1553-1575, November.
    3. Aaron Mehrotra & José R. Sánchez-Fung, 2010. "China’s monetary policy and the exchange rate," Working Paper Series, Federal Reserve Bank of San Francisco 2010-19, Federal Reserve Bank of San Francisco.
    4. Mehrotra, Aaron & Koivu, Tuuli & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 15/2008, Bank of Finland, Institute for Economies in Transition.
    5. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
    6. Chengsi Zhang, 2010. "Inflation Uncertainty and Monetary Policy in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(3), pages 40-55.
    7. Michael Geiger, 2008. "Instruments Of Monetary Policy In China And Their Effectiveness: 1994–2006," UNCTAD Discussion Papers, United Nations Conference on Trade and Development 187, United Nations Conference on Trade and Development.
    8. Zhang, Yin & Wan, Guang Hua, 2002. "Household consumption and monetary policy in China," China Economic Review, Elsevier, Elsevier, vol. 13(1), pages 27-52.
    9. Dickinson, David & Liu, Jia, 2007. "The real effects of monetary policy in China: An empirical analysis," China Economic Review, Elsevier, Elsevier, vol. 18(1), pages 87-111.
    10. Yu, Qiao, 1997. "Economic Fluctuation, Macro Control, and Monetary Policy in the Transitional Chinese Economy," Journal of Comparative Economics, Elsevier, vol. 25(2), pages 180-195, October.
    11. repec:diw:diwfin:diwfin07040 is not listed on IDEAS
    12. Dan Luo & Shujie Yao, 2010. "World financial crisis and the rise of Chinese commercial banks: an efficiency analysis using DEA," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 20(19), pages 1515-1530.
    13. Alan Greenspan, 2004. "Risk and Uncertainty in Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 33-40, May.
    14. Bernard Laurens & Rodolfo Maino, 2007. "China," IMF Working Papers, International Monetary Fund 07/14, International Monetary Fund.
    15. Burdekin, Richard C.K. & Siklos, Pierre L., 2008. "What has driven Chinese monetary policy since 1990? Investigating the People's bank's policy rule," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(5), pages 847-859, September.
    16. Matteo Iacoviello & Raoul Minetti, 2002. "Financial Liberalisation and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence," Boston College Working Papers in Economics, Boston College Department of Economics 538, Boston College Department of Economics.
    17. Marco Del Negro & Christopher Otrok, 2005. "Monetary policy and the house price boom across U.S. states," Working Paper, Federal Reserve Bank of Atlanta 2005-24, Federal Reserve Bank of Atlanta.
    18. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
    19. Pan, Liu & Tao, Xie, 2006. "The monetary policy transmission in China: "Credit channel" and its limitations," Working Papers, Institute of Management Berlin (IMB), Berlin School of Economics and Law 22, Institute of Management Berlin (IMB), Berlin School of Economics and Law.
    20. Zhang, Wenlang, 2009. "China's monetary policy: Quantity versus price rules," Journal of Macroeconomics, Elsevier, Elsevier, vol. 31(3), pages 473-484, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:not:notgep:11/04. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hilary Hughes).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.