Asset Prices, Anticipated Shocks, and Macroeconomic Fluctuations of China
ZHUANG Ziguan, HAN Kaiming, LIU Dingming, WANG Xi
School of Finance,Zhongnan University of Economics and Law; Center for Macroeconomic Research, Xiamen University; Wang Yanan Institute for Studies in Economics, Xiamen University; School of Economics, Peking University
Summary:
In the face of multiple challenges both domestically and internationally, stabilizing market confidence and maintaining a positive outlook among the public are of paramount importance for economic development. Understanding how economic agents' expectations are formed, grasping the transmission channels of expectations in the economy, and accurately assessing the significance of various anticipated shocks on economic fluctuations are the foundations for effective expectation management. A substantial body of literature has discussed the relationship between expectation changes and macroeconomic fluctuations by constructing Dynamic Stochastic General Equilibrium (DSGE) models, considering expectations as a significant factor influencing macroeconomic fluctuations. However, asset prices, which are crucial channels for the transmission of expectations, often receive insufficient attention in discussions of expectations. The connection between asset prices and expectations is close: on one hand, changes in asset prices reflect changes in economic agents' expectations of future economic fundamentals; on the other hand, expectations and the formation of asset prices are closely intertwined. Macroeconomic fluctuations or changes in economic fundamentals can affect economic agents' expectations, subsequently influencing their investment decisions and other choices, ultimately manifesting in asset prices. Therefore, exploring whether asset prices contribute to understanding the role of expectations in the Chinese economy is not only theoretically important for clarifying the relationship between asset prices, anticipated shocks, and macroeconomic fluctuations but also holds practical significance for stabilizing public expectations and promoting stable economic development. This paper constructs a New Keynesian DSGE model, incorporating settings that reflect the unique characteristics of the Chinese economy and introducing multiple long-run anticipated shocks. Bayesian estimation serves as the foundation for quantitative analysis, with macroeconomic data and asset price data (stock prices and market interest rates) being used to estimate the model. This paper demonstrates that the information contained in asset prices is helpful in accurately assessing the impact of anticipated shocks on the Chinese economy. First, we compare estimation results of unconditional variance decompositions and second-moment results of key model variables between datasets that include asset price data and those that do not. We find that asset price data contain additional information about expectations, aiding in the correct identification and evaluation of the impact of anticipated shocks on economic fluctuations in China. Then, based on the estimated results with asset prices, this paper further decomposes forecast error variances for both macroeconomic and asset price variables. It reveals that anticipated shocks can explain more than 50% of output, consumption, and investment fluctuations, as well as nearly all asset price fluctuations. Different variables exhibit varying degrees of sensitivity to expectations over time, with asset prices being the most sensitive. Subsequently, the paper contrasts the differences between long-run anticipated shock processes and short-run anticipated shock processes, demonstrating long-run anticipated shock processes have advantages in model fitting. Finally, through welfare analysis, the paper finds that incorporating a response to asset prices in monetary policy can effectively mitigate welfare losses resulting from anticipated shocks. The contributions of this paper to the existing literature are followings: firstly, it bridges the gap between research on anticipated shocks and asset prices, emphasizing the need to consider asset price data that are sensitive to expectations when studying anticipated shocks. Secondly, there is limited consideration of long-run shock processes in both domestic and international research on business cycles. This paper conducts a detailed comparison of the model fitting of long-run and short-run shock processes to the Chinese economy, demonstrating the advantages of using long-run anticipated shocks in fitting Chinese macroeconomic and asset price data. Lastly, the paper employs welfare analysis to suggest that when facing economic fluctuations dominated by expectation factors, policy authorities adopting more flexible and diverse monetary policies, such as incorporating asset price factors into monetary policy rules, may effectively improve overall welfare.
庄子罐, 韩恺明, 刘鼎铭, 王熙. 资产价格、预期冲击与中国宏观经济波动[J]. 金融研究, 2023, 518(8): 1-18.
ZHUANG Ziguan, HAN Kaiming, LIU Dingming, WANG Xi. Asset Prices, Anticipated Shocks, and Macroeconomic Fluctuations of China. Journal of Financial Research, 2023, 518(8): 1-18.
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