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

  • 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.)

Registered author(s):

    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.

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    File URL: http://www.ipe.ro/rjef/rjef4_13/rjef4_2013p56-66.pdf
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    Article provided by Institute for Economic Forecasting in its journal Romanian Journal for Economic Forecasting.

    Volume (Year): (2013)
    Issue (Month): 4 (December)
    Pages: 56-66

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    Handle: RePEc:rjr:romjef:v::y:2013:i:4:p:56-66
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    1. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
    2. Huang Yiping & Wang Xun & Hua Xiuping, 2010. "What Determine China’s Inflation?," Macroeconomics Working Papers 22770, East Asian Bureau of Economic Research.
    3. Gerlach, Stefan & Assenmacher-Wesche, Katrin, 2008. "Financial structure and the impact of monetary policy on asset prices," CFS Working Paper Series 2008/30, Center for Financial Studies (CFS).
    4. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
    5. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
    6. Gerdesmeier, Dieter & Roffia, Barbara & Reimers, Hans-Eggert, 2009. "Asset price misalignments and the role of money and credit," Working Paper Series 1068, European Central Bank.
    7. Claudio Borio, 2005. "Monetary and Financial Stability: So Close and Yet So Far?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192(1), pages 84-101, April.
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