Asset Prices, Monetary Policy and China's Economic Fluctuations

This paper investigates asset prices volatility in China's macroeconomic fluctuations and the dynamic transmission mechanism of monetary policy shocks within a new Keynesian dynamic stochastic general equilibrium model. Parameters are estimated by calibration method, asset prices volatility and economic fluctuation are inspected with variance decomposition and then impulse response functions are used to analyze the role of monetary policy. The empirical results show that monetary policy shock and investment shock are the main driving forces of economic fluctuations. Asset price volatility is mainly induced by monetary policy. A positive shock to monetary policy causes pro-cyclical movement in macroeconomic variables such as asset price, output, consumption and wages and counter-cyclical fluctuations in inflation. The current demand management policy may contribute to achieve macroeconomic stability.