Liquidity Characteristics, Implicit Information of Asset Prices and Monetary Policy in China

This paper empirically analyzes the liquidity characteristics of asset price boom-busts and the implicit information of asset prices in China during the period 1998-2011. The results indicate that liquidity plays an important role in asset price cycles and asset prices contain specific information of future output and inflation. Housing price booms are more consistent with credit expansion than stock price. Likewise, housing price has stable positive connection with future output gap and inflation relative to stock price. Based on the above results, the Chinese monetary policy should intervene in asset prices misalignment when in need, even targeting at housing price as conditions permit. Besides, credit control should be adopted to restrain housing price effectively.