Asset Price Inflation
The Role of Central Banks in Controlling Asset Price Inflation—-A Systemic Solution
The policy structure of modern central banks has been lagging behind the ever changing economic and financial environment.Monetary policy alone can no longer achieve multiple objectives including asset price and financial stability. Legislative bodies and the central banks need to rethink central bank’s policies in terms of asset and financial stability,based on the environment change as well as the characteristics of the asset price.This paper seeks to provide an integrated solution for central banks to control asset price inflation,including the policy framework as well as particular policy instruments.
Research on the Monetary Policy Framework of Inflation Targeting
The economic stagnation in 1970s makes the western world aware that among a good many of goals of the government’s economic policy, the overwhelming purpose of monetary policy should be pursuing long-term price stability, thus the construction of theinstitution—-inflation targeting—-to guarantee this. The mechanism of pricestability in inflation targeting has made the operation of monetary policy more forward-looking and flexible. When facing assets boom-bust cycles During 1990s, flexible inflation provides a unified framework both for achieving price stability and for preventing and ameliorating the effects of financial crises through “the financialaccelerator” and guaranteeing financial stability.With the current difficult situation that China’s monetary policy finds itself in, more study on the inner mechanism of price stability under inflation targeting thus shows very important and significant to China. Through analysis on the institutional innovation of conducting monetary policy and the mechanism of price stability and financial stability in inflation targeting, it is more advised that a shift should be made in the monetary policy: from the focus of economic growth to that of the sustained stability of price; and from maintaining external balance to the internal balance .It is essential that the stability of price be kept as a long–term number–one monetary policy. Only in this way can China strengthen up its new monetary strategy of inflation targeting with greater flexibility.The paper is constructed as follows: Chapter 1 is the introduction; Chapter 2 starts with the theories of pursuit price stability, while Chapter 3 discusses the institutional innovations for monetary policy to pursuit price stability; Chapter 4 presents inflation targeting under monetary policy rules and Chapter 5 analysis the mechanism of price stability in inflation targeting; Chapter 6 continues to analysis the relationships of asset price inflate and inflation targeting, then analysis the mechanism of price stability and financial stability in inflation targeting; Chapter 7 shows international experiences of inflation targeting based on several different groups of countries, the first group includes Germany and Switzerland; the second group is New Zealand ,Canada and United Kingdom and the other group contains Chile, Brazil and Czech; Chapter 8 prefers to discuss inflation targeting in China and Chapter 9 is the conclusions and the future research of the paper.The main contributions of the paper are: First, from special research perspectives, the paper mainly put focus on analysis the mechanism of price stability in inflation targeting and relationships between asset boom-bust cycles and inflation targeting.The second, based on the analysis of this papers, there are two new conclusions that contribute to present Chinese literatures about inflation targeting: (1) Inflation targeting in practice is really not a strict rule but a strategy of “constrained discretion ” which concerns about not only price stability but also outputs growth and exchange rate while it’s also a fine-tune strategy for monetary policy-makers to adjust gradually to inflation target when the deviations from the expectative inflation to the target happen. The mechanism of price stability and the role of expectation stability in inflation targeting can promote long-run stability which in turn to promote outputs growth and full-employment through providing a stable environments. (2) By analysis the relationship between price stability and assets boom-bust cycle, the paper states that a low-level inflation which comes from implementing inflation targeting should not but the financial imbalance, irrational speculation and the excessive of assets substitution contribute to assets boom-bust. Long-run price stability is the prerequisite of output growth and financial stability. Price stability and financial stability can be achieved in the monetary policy framework of inflation targeting. (3) By testing on the relationships between inflation and the asset price volatility in China, the paper has proved that the excessive growth in bank credit and the sharply growth of foreign exchange reserves do play an crucial role on quickly growing of liquidity that promotes the inflation of asset price, and in the end boosts the inflation.
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