Abstract:
A monetary policy rule which contains the characteristics of concerning multiple asset prices is derived with reference to current macroeconomic models. Then by using real estate price, stock price and financial condition index (FCI) as asset price deputies respectively, we study the reaction of monetary policy to asset price using BEKK multivariate GARCH model including Markov Regime-Switching, so as to capture the time variant feature of monetary policy. It’s shown that: (1) the monetary policy’s concern on asset price has the Markov Regime-Switching feature; (2) the integrated FCI index is superior to the single asset price (real estate and stock price indices) as asset price deputy; (3) monetary policy only concerns asset price when it exhibits strong volatility, while at other times, the traditional Taylor rule focusing only on output gaps and inflation rates, remains a better description of policy behavior. The conclusions are rubust over different periods. These conclusions show that the central bank does concerns asset prices when its volatility become larger, which implies a macro-prudent intention in maintaining financial stability.
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