《discussion-paper-71-monetary-policy-and-asset-prices》.pdf

Discussion Paper 71 ON CHINA’S MONETARY POLICY AND ASSET PRICES Shujie YAO, Dan LUO and Lixia LOH March 2011 China Policy Institute School of Contemporary Chinese Studies International House The University of Nottingham Jubilee Campus Wollaton Road, Nottingham NG8 1BB, UK Email: CPI@nottingham.ac.uk Website: The China Policy Institute, part of the School of Contemporary Chinese Studies at The University of Nottingham, was set up to analyse critical policy challenges faced by China in its rapid development. Its goals are to help expand the knowledge and understanding of contemporary China in Britain, Europe and worldwide, to help build a more informed dialogue between China and the UK and Europe, and to contribute to government and business strategies. ON CHINA’S MONETARY POLICY AND ASSET PRICES Shujie Yao, Dan Luo and Lixia Loh Abstract This paper investigates the dynamic and long-run relationships between monetary policy and asset prices in China using monthly data from June 2005 to September 2010. Johansen‟s cointegration approach based on vector autoregression (VAR) and Granger causality test are used to identify the long-run relationships and directions of causality between asset prices and monetary variables. Empirical results show that monetary policies have little immediate effect on asset prices, suggesting that Chinese investors may be „irrational‟ and „speculative‟. Instead of running away from the market, investors rush to buy houses or shares whenever tightening monetary actions are taken. Such seemingly irrational and speculative behavior can be explained by various social and economic factors, including lack of investment channels, market imperfections, cultural tradi