1. Introduction & A ; Motivation

With the development of modern capital market and fiscal invention, the universe economic system has into the fiscal economic system epoch, and disappears progressively capitalisation, virtualization tendencies. It is no uncertainty that modern capital market has provided a powerful lever for economic growing, but it ‘s instability besides cause macroeconomic fluctuations, and in peculiar the plus monetary value bubbles, which is going a cardinal factor for fiscal crisis and economic fluctuations.

So far, the most developed Western states have experienced a long period of rapid growing, concern is that planetary plus monetary value has increased aggressively in recent old ages. In the late eightiess, the stock market and existent estate in Japan as the representative of plus monetary values have greatly increased, which besides caused Nipponese economic system into the bubble economic system, the recognition crunch and economic recession originating from the bubble economic system have serious negative effects so far. In 2006, the Dow Jones industrial mean index in USA was beyond the highest point of web engineering bubble enlargement from 2000, the stock market of many other developed and emerging market states by and large strongly increased and was beyond history records. In add-on to the security market, the planetary existent estate, gold and oil market are besides really active. In 2001-2005, existent estate monetary values have about doubled in many developed states, meanwhile, existent estate monetary value in many developing states has besides by and large increased. In May 2006, the international topographic point gold monetary value reached USD per ounce 718 mark in New York City market since 1980. In mid-July 2006, the International petroleum oil hereafters monetary value GE exceeded the highest record to make 75 USD/barrel. But, necessarily brought the more serious fiscal crisis in 2007, which has caused immense economic fluctuations to the economic system from 2007.

In China, securities market have established for ten old ages, the portions of negotiable securities in the construction of occupants ‘ capital portfolios continued to be increasing, in 1992, the entire value of Chinese stock market is 1048 billion kwais, accounting for merely 3.9 % of gross domestic merchandise ( GDP ) ratio. But in 2007, the stock market value is 327141 billion kwais, the ratio of market value in GDP has being greatly lifting to 130 % , which is 312 times growing compared with the entire stock market value in 1992. Not merely a immense sum, but besides the fluctuations of plus monetary values have become more frequent and intense. In 2006-2007, Chinese economic system under the driven of stock market and existent estate market has a certain grade of plus monetary value bubbles. While in the same clip, Chinese economic system is really confronting the world of plus monetary value falling from the top figure, shanghai security market falls quickly from the peak place in 2007, the stock market bubbles receive the bulge, the existent estate market likewise is besides confronting the similar state of affairs, house monetary value of major metropoliss has falls evidently, the turnover falls into the vale.

All of these fiscal crisis invariably are reminding people that the world-wide economic fluctuations are characterized by the fiscal instability, and economic cyclical fluctuations, alternatively of disappearance, and to be acquiring worse, cause considerable economic depression, frequent plus monetary value volatility and fiscal crisis and economic recession originating from the plus market prostration, hence, the authorities should concentrate on the plus monetary values on the function of macroeconomic fluctuations and the cardinal bank in the universe have to see the information from plus monetary value fluctuations. The Fed Chairman Alan Greenspan and Bernanke concern much about pecuniary policy and plus monetary value volatility. Alan Greenspan proposed cardinal Bankss should be more concerned about the issue of plus monetary value bubbles in the anniversary meeting observing the constitution of the Bank of England in 1994. Chairman Bernanke is an internationally recognized as the laminitis of pecuniary policy and plus monetary value research. At their encouragement, the international academic community and the national cardinal Bankss have recent research and argument whether the pecuniary governments should step in straight in plus monetary value fluctuations. These research and arguments are from the different backgrounds in different states, in conformity with their different premises and premises, supply some significance policy advice.

Fiscal markets in peculiar capital market intensifying and broad-based, and fiscal invention enables fiscal establishments have diverseness characteristics. The boundaries of currency and other fiscal assets is film overing, money supply and existent economic variables lost stableness, the pecuniary policy impact on the existent economic system is no longer limited to traditional attacks, harmonizing to the traditional Keynesian theory, this impact on ingestion and investing chiefly through involvement rate variable. But as the betterment of fiscal system and addition of fiscal assets stock, pecuniary policy can besides utilize the wealth consequence of plus monetary values and Tobin q to impact the ingestion and investing, doing the alterations of entire demand, in stick monetary value, the aggregative demand led to a alteration in the end product, and do the consequence of the end product alterations on demand, if the aggregative demand exceeds the aggregative supply, it can take to rising prices force per unit areas. This series of transmittal mechanism make the function of plus market on the existent economic system become more outstanding, plus monetary value has become a major transmittal channel of pecuniary policy.

From the world in China, the quickly development of plus markets have a cardinal function in our national economic system, the impact of existent estate market and stock market on economic and pecuniary policy are going progressively evident. In fact, the Chinese pecuniary governments have besides already get down to pay attending to the relationship of plus monetary value and pecuniary policy. Xiaochuan, Zhou, as the Governor of Chinese cardinal bank, says that the cardinal bank concerns about alterations in plus monetary values and gives full attending to information from plus monetary value when formulating and implementing pecuniary policy. Thereforei??study the relationship between plus monetary value and pecuniary policy in Chinese economic system is significanti?Z

This thesis analyze the relationship of plus monetary value and pecuniary policy

consistently, and will utilize econometric methodological analysis to seek to research the relationship between plus monetary value and pecuniary policy in China by utilizing quarterly statistics from 1998 to 2008. I will gauge the relationship between pecuniary policy variables and plus monetary value variables, through correlativity analysis, unit root testi??cointergration trial Granger Causality trial to acquire the decision. This thesis conclude the consequences thati?smonetary policy and plus monetary value have a long-run relationship, in a short clip, the pecuniary policy aggravated the plus monetary value fluctuations to some degreei??the plus market appeared to be quickly soared and shirked in a short period of timei?ZThe cardinal bank should concentrate on the function of plus monetary value on the transmit mechanism of pecuniary policy.

## 2. Literature Reappraisal

## 2.1 Empirical Surveies from Western Economists

The research from western economic experts on relationship of plus monetary value fluctuations and pecuniary policy chiefly reflects the two positions. First, plus monetary value and pecuniary policy do non be the causal relationship on behaviour, and the lone relationship is on the information that reflects the present and future end product growing. Another position on research of plus monetary value fluctuation and pecuniary policy is that plus monetary value can impact ingestion and investing through wealth effects, the alteration of capital cost and plus monetary value fluctuations affect ingestion and investing severally through wealth effects and Tobin q, therefore affect the fiscal establishments position of assets and liabilities, farther affect the stableness of the fiscal system. It is obviously that plus monetary value has become the transmittal mechanism of pecuniary policy.

Frank Smets ( 1997 ) is one of the economic expert who consistently analysis the optimum pecuniary policy that Central Bank should response on plus monetary value alteration. He has proposed the following of import point of view: how the cardinal bank should react to pecuniary policy reflecting the unexpected alteration of plus monetary value, how this alteration affect the cardinal bank ‘s rising prices prognosis. There are two factors impacting the cardinal bank prognosis rising prices. First is that the consequence of plus monetary value on conveying mechanism of pecuniary policy. Second is that the alone information on plus monetary value. He established a simple macro-economic theoretical account that contains equation of Phillips curve, aggregative demand on fiscal plus monetary values ( as represented by the stock monetary value ) , arbitrage and dividend, he uses this theoretical account to analyze the assortment of ways that alteration of fiscal assets monetary value affect the existent economic system, and analysis the optimum pecuniary policy of cardinal bank response to fiscal plus monetary value motions. He demonstrate that the optimum pecuniary policy of cardinal bank response to fiscal plus monetary value motions, that is, harmonizing to the construction of established theoretical account, leaden norm of the short-run involvement rate ( traditional intermediary mark of pecuniary policy ) and plus monetary value as monetary value index – pecuniary conditions index ( MCI ) , and see this index as the mark of pecuniary policy operations, therefore it can decently steer cardinal bank make efficaciously response on pecuniary policy to alter of fiscal assets monetary value.

Gunnarsson and Lindqvist ( 1997 ) have discussed the function of plus monetary value on pecuniary policy from the wealth consequence on alteration of plus monetary value and the consequence of rising prices. They conclude that the pecuniary policy should be given more attending on the alteration of plus monetary value, although it is really hard to explicate. They believe that the alteration of plus monetary value affect pecuniary policy every bit long as this alteration is long-run alteration, and in recent old ages, the impact of this alteration of plus monetary values on the economic has been more and more of import, so the cardinal bank should pass more energy to analyse the relationship of plus monetary values and pecuniary policy, although this relationship is difficult to explicate but so bing. They believe that plus monetary value as an index for pecuniary policy might lend to the rising prices prognosis.

B.Bemanke and M.Gcrtler ( 2000,2001 ) have provided that: In an peculiar assigned state of affairs, the pecuniary policy respond to the alteration of plus monetary value is determined by if existing of the rising prices or the deflation force per unit area on existent economic system or non, if this alteration of plus monetary value do non convey the rising prices or the deflation force per unit area on the existent economic system, so the pecuniary policy does non necessitate to react to this sort alteration of plus monetary value, but If this alteration of plus monetary value indicates that it so brings the rising prices or the deflation force per unit area on the existent economic system, so the pecuniary policy should do some response to relieve this force per unit area. They propose the above policy earnestly under the system frame of flexible currency rising prices end.

Cecchetti, Genberg, Lipsky and Wadhwani ( 2000 ) have noted that how the cardinal bank respond to plus monetary value fluctuation chiefly depends on the nature of the plus monetary value fluctuation. When merely have the daze of fiscal facet on macro-economy, the cardinal bank ‘s exchange rate policy should do an appropriate response, because making so will avoid the fiscal daze on the stableness of existent economic system. When the cardinal bank ‘s mark is to minimise the fluctuations of Inflation ratio and economic end product spread to their mark value, the cardinal bank take possible action to extinguish the negative effects of fiscal volatility is a really good thing.

## 2.2 Empirical Surveies from Chinese Scholars

After the Asiatic fiscal crisis in 1997, the bookmans in China have began to research the relationship between plus monetary value and pecuniary policy. From a theoretical point of view, on the one manus, pecuniary policy have an impact on plus monetary values through the adoptive operation tool, on the other manus, as a practical plus comparatively to physical plus, plus monetary value fluctuations can besides hold some impact on people ‘s ingestion and investing behavior, hence, affect economic development through consumer and investing, farther transmit pecuniary policy intent to the existent economic system.

Xiao’an Qian ( 1998 ) finds that alteration of plus monetary value make a trouble in pecuniary policy transmittal mechanism, this will do the certain effects on pecuniary measure direction, rising prices control and fiscal hazard turning away. The addition of plus monetary value has been made transmittal function of the pecuniary policy in the currency market alteration and go a beginning of financess in the plus markets, doing short-run financess long-run business, so that the transmittal mechanism of pecuniary policy to happen trouble. Part of financess seperated from the bank system, straight to the practical plus markets.

Wenjun Xun ( 2000 ) believes that the development of capital market increase the figure of the emerging non-bank organisation such as old-age pension fund, the common fund, the Insurance company and so on, the bank besides participates in the competition of capital market, the consequence of the capital market on the existent economic system bit by bit highlight, the familial mechanism of pecuniary policy additions, economic topic and its behaviour are diverseness, uncertainness about the economical motion additions, therefore the familial mechanism of pecuniary policy is more complex. They thinks that Central Bank ‘s pecuniary policy should command official involvement rate through the market, therefore indirectly act upon the bond and the stock market monetary value in capital market, farther influence existent economic system, achieves the pecuniary policy end.

Qiang Qu ( 2001 ) has found that it is hard to set plus monetary values as the end of direct control of pecuniary policy in the pecuniary policy operations, the possibilities and truth of constitution of general plus monetary value index is really little, plus monetary values can merely be used as an indirect mention, in short, to concern on it, but non aim on it.

Gang Yi and Zhao Wang ( 2002 ) have considered that pecuniary policy have impact on fiscal plus monetary values ( in peculiar the stock monetary value ) , the relationship of currency measure and rising prices non merely depends on the monetary value of goods and services, and in a certain grade depends on the stock market.

Tianyong Guo ( 2006 ) has affirmed the function of plus monetary value fluctuation on existent economic system, fiscal stableness and pecuniary policy through analysis, at the same clip, he besides points out that the plus monetary value as regulative marks exist troubles.

Chang Cui ( 2007 ) analysis the function of plus monetary value on pecuniary policy through the theoretical account, in plus monetary value rising prices period, the cardinal bank can take the step of involvement rate for a given period excessively control plus monetary value fluctuation, and command the money supply when plus monetary value bubbles exist will have immediate consequence. While in plus monetary value downswing period, involvement rate adjust plus monetary value have obvious and comparatively lasting consequence.

Yuanquan Yu ( 2008 ) obtains through the empirical analysis: the plus monetary value has a certain influence on macroeconomic, peculiarly the consequence of house monetary value is more obvious. Therefore, the Central Bank must give the appropriate attending and control on plus monetary value in the implement of pecuniary policy.

In an decision, the plus monetary value fluctuations have an certain impact on the ultimate aim of pecuniary policy, we can non disregard the alone function of plus monetary value on the transmittal mechanism of pecuniary policy and the macro-economic activities. The cardinal bank should concentrate on the consequence of plus monetary values on pecuniary policy, peculiarly in plus monetary values fluctuations periods, the huge bulk of economic experts believe that the cardinal bank should take an certain pecuniary policy to turn to and cut down the negative consequence of the economic system. For most of research focal points on the survey of plus monetary value fluctuation and its relationship with pecuniary policy, the function of plus monetary values in the transmittal mechanism of pecuniary policy, every bit good as the consequence size issues, this thesis based on the domestic and foreign scholar research consequences, profoundly analyzes the familial mechanism of pecuniary policy in plus monetary value through the impact of pecuniary policy on plus monetary value.

## 3. Data Description

This thesis focal point on the relationship between plus monetary value and pecuniary policy in China harmonizing to the quarterly statistics during the twelvemonth of 1998 to 2008.

This thesis chiefly use the stock monetary value ( index ) and house monetary value ( hsp ) as indexs of plus monetary value, and utilize boarder money supply ( M2 ) , fiscal establishment loan ( loan ) , existent rate ( rate ) as indexs of pecuniary policy for simpleness. Due to the sum of the informations of these variables are truly great, we take log of these variables to analyse. This thesis acquire all needed information from China Economic Information Network, which is a professionals establishment engage in the development of economic informations resources and services, provide informations support, informations integrating, and other concern informations analysis for authorities and research establishments. All the quarterly information we need from 1998 to 2008 is recorded in the China Economic Information Network.

## aˆˆ

## 3.1 Indexs for plus monetary value in China

Asset monetary values by and large including stock monetary values, bonds, monetary values, and even exchange rate, and other fiscal assets and house monetary values. However, the stock monetary value and house monetary value have a important consequence on existent economic system, and its fluctuations can hold a cardinal function in pecuniary policy decision-making, hence, in this thesis, we will utilize the stock monetary value and house monetary value refer to the plus monetary value. In peculiar, the Shanghai securities composite index is on behave of the stock monetary value for information restrictions, Shanghai securities composite index is established by the Shanghai stock market to reflect the Shanghai securities merchandising market overall tendency. House monetary value is on behave of the mean house monetary value in China. We can easy acquire these informations from the China Economic Information Network.

## 3.2 Indexs for pecuniary policy in China

Monetary policy refers to the Government or the Central Bank influence economic activity, particularly by money supply control and ordinance of involvement rates. To accomplish a specific end or keep mark – for illustration, controling rising prices, accomplishing full employment and economic growing, straight or indirectly through unfastened market operations and puting the minimal modesty rate. There are many factors needed to be consider in implementing pecuniary policy, for information limitations, in this thesis, we chiefly consider the variable of lodger money supply, fiscal establishment loan and existent rate.

First, boarder money supply ( lnm2 ) indicates the alteration of aggregative supply and force per unit area status of rising prices in the hereafter. In China, boarder money supply is narrow money supply plus the economy, foreign currency and fiducial sedimentations of authorities, organisations, services, concerns and establishments in fiscal establishment. Boarder money supply can be used as a medium and long-run equilibrium mark to modulate of fiscal markets.It is normally the rate of lodger money supply increasing should be controlled at the sum rate of economic growing and monetary value rising prices, pecuniary motion.

Second, fiscal establishment loan have some disadvantage as a indexs of pecuniary policy. First, it is closely associated with the pecuniary policy aim. Currency circulation and sedimentation currency caused by loan, the Central Bank control the size of the loan, which besides mean to command the money supply. Second, fiscal establishment loan is an truth an endogenous variable, loan size is positive correlativity with loan demand. As a policy variables, loan size and the demand besides have a positive correlativity. Furthermore, informations of fiscal establishment loan is easy accessible.

Third, existent rate refers to the existent rate of involvement return that the depositors and investors can acquire after extinguishing of rising prices rate, it is calculate as nominate rate subtractions CPI. Real rate can be used as the index of Central Bank ‘s pecuniary policy due to following grounds: ( 1 ) existent rate reflect the supply of money and recognition, and able to demo the comparative supply and demand, it is correlativity with nominal involvement rate, High degree of involvement rate is thought to be a tight, low involvement rate degree of convergence are considered pecuniary relaxation. ( 2 ) existent rate belongs to the Central Bank, the Central Bank can utilize this tools to increase or diminish in involvement rates.

Table 1: indication for Variables

indication

Variables

Deduction

Lnindex

Shanghai securities composite index

Shanghai securities merchandising market overall tendency

Lnhsp

House monetary value

Real estate monetary value

Lnloan

Loan

fiscal establishment collection loan domestic

Lnm2

M2

lodger money supply: M2+M1

Rate

Real rate

nominate rate subtractions CPI.

## 4. Economic Theory and Econometric Model

The effectivity of pecuniary policy depends non merely on the sensitiveness of economic topics on policy signal, but besides on legion external factors of fiscal system. Harmonizing to the traditional Keynesian theory, when implementing expansionary pecuniary policy, addition of money supply will take to rate diminution, i.e. capital costs diminishing, farther increasing investing outgo, therefore increasing aggregative demand and aggregative end product. Meanwhile, addition of money supply will take to the bank modesty and sedimentation addition, therefore enhanced bank to increase the loan measure, the fund that the borrower attains addition, so the entire measure investing will increase, which besides lead to the measure of aggregative demand addition, therefore, the entire end product besides rise. We will utilize following econometric theoretical account to analyse the relationship of plus monetary value and pecuniary policy.

## 4.1. Analyzing correlativity coefficient

The correlativity coefficient is a step of two variables relate to each other and their close grade of effectual tools. Its absolute value is close to 1 description of relevancy, the stronger between variables, the more its relevancy with 0. If the correlativity coefficient is positive, so the variables presented to alterations in the relationship, with one variable with another variable alterations. But if the correlativity coefficient is negative, so the variables are alterations in the relationship in the opposite way. Using correlativity coefficient can be better measured variables and between pecuniary policy and plus monetary value correlativity between Extent its positive and negative symbol can bespeak the variable ask alterations way. By and large used to be associated matrix said.

## 4.2. Testing for Nonstationary

In clip series, stationary is a cardinal concepti?? as it allows powerful techniques for patterning and calculating to be developed. Stationary is by and large regarded as some form of informations stable or equilibrium. Stationary clip series have changeless mean and discrepancy, but its covariance merely determined by the clip distance. However, when clip series could non analyse as stationary, this types of clip series ever have a strong upwards or downward tendency over clip, we call it as nonstationary, and we can utilize differencing as an effectual tool to transform a nonstationary clip series into a stationary clip series. Sometimes, Transforming a nonstationary clip series into a stationary one needs more than one time differencing operation. By and large talking, if the differencing needs to be operated at least 500 times to accomplish a stationary clip series where vitamin D is the order of integrating, so the clip series is said to be integrated of order vitamin D, denoted by I ( vitamin D ) . Hence, the I ( 1 ) clip series besides referred to hold a unit root, while the I ( 0 ) clip series are stationary.

Dickey and Fuller ( 1979 ) provided an effectual method to prove a clip series is stationary or nonstationy clip series, which is besides called as Dickey-Fuller ( DF ) trial. The simple object is to prove the void hypothesis that the clip series have a unit root or non. The theoretical account the Dickey-Fuller ( DF ) trial involves bellows

In this thesis, indicates the variables on pecuniary policy and plus monetary value at clip t. I± denotes unknown parametric quantity and denotes the tendency. denotes the first difference which. Besides, the t-statistic for proving the void hypothesis that H0: =0 against the alternate hypothesis H1: & lt ; 0. In this paper, since house monetary value, boarder money supply and loan have a strong upward tendency, so we test these clip series under the theoretical account H0: against H1:

While the index and existent rate variable we consider under the theoretical account H0: against H1:

We besides can place the fittest slowdown K by running the ADF ( K ) trial, taking the fitted order K that gives the minimal AIC and BIC.

## 4.3 Cointegration

Formally, Engle and Granger ( 1987 ) defined the cointegration as if there exists a additive combination of two or more I ( vitamin D ) clip series which is I ( d ‘ ) with vitamin D ‘ & lt ; d. In most instance, two cointegrated clip series has a unit root, as I ( 1 ) , a their combination is stationary, as I ( 0 ) .

In pattern, we normally use cointegration trial to exam the long-term relationship among variables in economic sciences. If times series have relationship between variables, and the tendency of the two clip series has been common, and therefore there will be a additive combination of these clip series give us an stationary clip series.

In this thesis, we test the long-term relationship between pecuniary policy variable and plus monetary value variable by cointegration trial.First, we consider the arrested development of two I ( 1 ) clip series. The theoretical account is

To prove { } and { } are cointegrated, we need to exam that the remainders term { } is stationary.If the remainders term is I ( 1 ) , so this two times series do non hold a cointegration, otherwise, if the remainders term is I ( o ) , so this two times series are cointegrated. Under this instance, to prove the remainders for unit root, we can carry on DF/ADF-statistic trial.

In this paper, we denote that pecuniary policy variables as and we regress on a changeless and one of the plus monetary value variables as.

## 4.4. Causality Test

Granger ( 1969 ) provided that Granger causality trial can use by and large for proving the causal relationship on two clip series.Granger causality means that if { } Granger causes { } so { } have a predict power of { } , given any other variables. More officially, it is said that { } Granger causes { } ; when the prognosis of given informations on { } and { } outperforms the prognosis of given informations on { } merely. Granger causality is merely related to the predictability of { } utilizing { } and is non concerned as to whether { } causes { } , it could be that { } Granger causes { } but { } is non causal for { } , and frailty versa.

To prove for Granger causality, we could gauge the arrested development by OLS

In this thesis, denotes an index of plus monetary value, i.e. Shanghai composite index ( lnindex ) , house monetary value ( lnhsp ) , Besides, denotes the index of pecuniary policy, i.e. fiscal establishments aggregate loan ( lnloan ) , wide money ( lnm2 ) , existent involvement rate ( rate ) .

Then carry on an F trial on the void hypothesis against the option at least one of the is non zero. If we reject the void hypothesis, so

{ } has prognostic power for { } and hence, { } Granger causes { } , on the other manus, if we fail to reject the void hypothesis, so { } has no prognostic power for { } , hence, { } does non Granger causes { } .We normally test the two times series for Granger causality in braces, that is, first trial whether { } Granger causes { } and so prove whether { } Granger causes { } .If two variables have Grange causality relationship in both waies, i.e. { } Granger causes { } and { } Granger causes { } , so we could see these two varibles have causality relationship in both waies, that means these two variables are related. If two variables have Granger causality in one way, e.g. { } Granger causes { } but { } does non Granger do { } , so we can reason that these two variable merely hold a one manner causality relationship.

## 5. Presentation and Interpretation of Results

## 5.1. correlativity coefficient between pecuniary policy variables and plus monetary values variables

We analysis the correlativity between pecuniary policy variables and stock monetary values variable harmonizing to the informations provided by China Economic Information Network, and the correlativity coefficients are presented in Table 2 and Table 3.

Table 2 Correlation coefficient between lnindex and lnloan, lnm2, rate in 1998-2008

Lnindex

Lnloan

Lnm2

Rate

Lnindex

1.000000

Lnloan

0.4829

1.000000

Lnm2

0.4867

0.9980

1.000000

Rate

-0.4717

-0.9013

-0.9067

1.000000

As we can see, stock monetary value ( Lnindex ) has correlativity relationship with all pecuniary policy variables. With a higher stock monetary value, loan and money supply will be increased, while existent rate will be decreased. For pecuniary variables, loan and M2 have a strong positive correlativity, and M2 have a strong negative correlaton with existent rate. In decision, for the stock monetary value variable, it has fundamentally the positive correlativity with the loan and money supply variables, and has negatively correlativity with the existent rate.

Table 3 Correlation coefficient between lnhsp and lnloan, lnm2, rate in 1998-2008

Lnhsp

Lnloan

Lnm2

Rate

Lnhsp

1.000000

Lnloan

0.9667

1.000000

Lnm2

0.9633

0.9980

1.000000

Rate

-0.8453

-0.9013

-0.9067

1.000000

From table 3, we can see house monetary value ( Lnhsp ) has correlativity relationship with all pecuniary policy variables. With a higher house monetary value, loan and money supply will be increased, while existent rate still will be decreased. In decision, for the house monetary value variable, it has fundamentally the strong positive correlativity with the loan and money supply variables, and has strong negatively correlativity with the existent rate.

## 5.2.Results for unit root trial

We exam pecuniary policy variables and plus monetary values variables by Augmented Dickey-Fuller ( ADF ) to prove the stationary of clip series. First, we choose the AIC and BIC to find the fitted slowdown it suggest that the optimum slowdown for clip series is lag K =1, Then we run ADF to prove stationary of clip series. Consequences are below:

Table 4i?sAugmented Dickey-Fuller Unit Root Test for Variables

Seriess

ADF

Test critical values

Consequences

5 %

1 %

Lnhsp

-1.685

-3.41

-3.96

hold a unit root

Lnindex

-2.085

-2.86

-3.43

hold a unit root

Lnm2

-1.992

-3.41

-3.96

hold a unit root

Lnloan

-1.993

-3.41

-3.96

hold a unit root

Rate

-1.185

-2.86

-3.43

hold a unit root

We conserder Lnindex and Rate for unit root trial under instance which is changeless without tendency, and acquire the ADF values are -2.085, and -1.185.The critical values are from the asymptotic critical values of the ADF statistic tabular array. From the ADF statistic tabular array. We know the critical value at the 5 % important degree is -2.86, while it is -3.43 at the 1 % important degree. Since Lnindex ADF value is-2.085, which is greater than -2.86 and Rate ADF value is -2.400, which is besides greater than -2.86, so we fail to reject the void hypothesis at the 5 % significance degree and conclude that we have grounds that both Lnindex and rate have a unit root, and besides intend that the clip series is nonstationary. Since Lnhsp Lnm2 and Lnloan of the informations have a strong upwards or downward tendency, so we exam these three clip series under instance which is changeless with tendency, and acquire the ADF values are -1.1685, -1.992 and -1.993. From the ADF statistic table.We know the critical value at the 5 % important degree is -3.41, while it is -3.96 at the 1 % important degree. Since ADF value of Lnhsp, Lnm2 and Lnloan is -1.1685, -1.992 and -1.993 severally, which are all greater than -3.41 at tungsten at the 5 % significance degree, and which is besides greater than-3.96, at the 1 % significance degree, so we fail to reject the void hypothesis at the 5 % and 1 % significance degree and conclude that we have grounds that Lnhsp Lnm2 and Lnloan have a unit root, and the clip series is nonstationary.

To prove the orders of integrating of all the clip series, therefore, we do foremost differencing to all clip series and add an initial D to each variables to bespeak the new variables. We use ADF-test once more to prove all the first differencing variables as above. The fitted slowdown we consider is besides lag=1, the consequences are shown in Table 4.

Table 5i?sResults from ADF-test with first difference variables

Seriess

ADF

Test critical values

Consequences

5 %

1 %

DLnindex

-3.525

-2.86

-3.43

I ( 0 ) Stationary

DLnhsp

-4.484

-3.41

-3.96

I ( 0 ) Stationary

DLnm2

-4.876

-3.41

-3.96

I ( 0 ) Stationary

DLnloan

-3.854

-3.41

-3.96

I ( 0 ) Stationary at 5 %

Have a unit root at! %

DRate

-3.943

-2.86

-3.43

I ( 0 ) Stationary

From above tabular array, the ADF values of all 5 variables are -3.525, -4.484 -4.876, -3.854 and -3.9459 which are smaller than the critical values at 5 % important degree, so we reject the hypothesis at 5 % important degree, and conclude that we have no grounds that all the first difference clip series have unit roots. It suggests that, after first difference for each of the clip series, informations have been stationary. Furthermore, it shows that the original series of lnindex, lnhsp, lnloan, lnm2 and rate are I ( 1 ) ; their orders of integrating are 1.While at 1 % important degree, the ADF value of Dlnloan is greater than critic degree, so we conclude that Dlnloan have a unit root.

## 5.3 Consequences for cointegration trial

We need to prove the long-term relationship of plus monetary value variables and pecuniary policy variables by utilizing cointegration trial, so we use ADF-test to prove the residuary.From the statistic tabular array, we know the 5 % critical values is -3.34.while, the 1 % critical values is -3.9.

5.31 Cointergrate trial of Lnm2 and Lnindex

Fitted arrested development theoretical account is Lnm2=7.64+0.62Lnindex+

For the residuary, the ADF-test consequences is -4.61, Since -4.61 is smaller than critical values, so we reject H0 at both 5 % and 1 % significance degree and we have grounds that the residuary is stationary, hence we conclude that the Lnm2 and Lnindex have cointegration relationship.

5.32 Cointergrate trial of Lnm2 and Lnhsp

Fitted arrested development theoretical account is Lnm2=-3.58+2.02 Lnhsp +

For the remainders, the ADF-test consequences is -4.883, Since -4.883 is smaller than critical values, so we reject H0 at both 5 % and 1 % significance degree and we have grounds that the remainders is stationary, hence we conclude that the Lnm2 and Lnhsp have cointegration relationship.

5.33 Cointergrate trial of Lnloan and Lnindex

Fitted arrested development theoretical account is Lnloan =8.02+0.52Lnindex+

For the remainders, the ADF-test consequences is -4.777, Since -4.777 is smaller than critical values, so we reject H0 at both 5 % and 1 % significance degree and we have grounds that the residuary is stationary, hence we conclude that the Lnloan and Lnindex have cointegration relationship.

5.34 Cointergrate trial of Lnloan and Lnhsp

Fitted arrested development theoretical account is Lnloan =-1.61+1.72Ln Lnhsp +

For the remainders, the ADF-test consequences is -4.397, Since -4.397 is smaller than critical values, so we reject H0 at both 5 % and 1 % significance degree and we have grounds that the remainders have a unit root, hence we conclude that the Lnloan and Lnhsp have cointegration relationship.

5.35 Cointergrate trial of Rate and Lnindex

Fitted arrested development theoretical account is Rate =21.08 -2.67Ln Lnhsp +

For the remainders, the ADF-test consequences is -4.473, Since -4.473 is smaller than critical values, so we reject H0 at both 5 % and 1 % significance degree and we have grounds that the remainders have a unit root, we conclude that Rate and Lnindex have cointegration relationship.

5.36 Cointergrate trial of Rate and Lnhsp

Fitted arrested development theoretical account is Rate =63.29 -7.91Ln Lnhsp +

For the remainders, the ADF-test consequences is -4.4381, Since -4.4381 is smaller than critical values, so we reject H0 at the 5 % significance degree and we have grounds that the remainders have a unit root, hence we conclude that Rate and Lnhsp have cointegration relationship.

In amount, by the testing processs as above, we can reason that pecuniary policy variables and plus monetary value variables have cointegration relationship, which means that they have long-term relationship based on quarterly informations during the period from 1998 to 2008 in China. The cardinal bank should concentrate on the long-term relationship of plus monetary value and pecuniary policy.

## 5.4 Consequences from Granger Causality Test

We exam the short-term relationship between plus monetary value variables and pecuniary policy variables utilizing Grange Causality Test, and uncover the predict power of these variables. We proceed the Granger causality trial of plus monetary value variables and pecuniary policy variables in lag=1and 4. Consequences are shown below.

1. . Causality trial between pecuniary policy variables and stock monetary values variable

Table 7: Lag=1 Granger causality trial

Null Hypothesis

F-Values

Test Critical Values

Consequences

10 %

5 %

Lnloan Does Not Granger Cause Lnindex

F ( 1,40 ) =0.11

4.61

5.99

Accept Null

Lnindex Does Not Granger Cause Lnloan

F ( 1,40 ) =0.03

4.61

5.99

Accept Null

Lnm2 Does Not Granger Cause Lnindex

F ( 1,40 ) =0.14

4.61

5.99

Accept Null

Lnindex Does Not Granger Cause Lnm2

F ( 1,40 ) =0.07

4.61

5.99

Accept Null

Rate Does Not Granger Cause Lnindex

F ( 1,40 ) =0.01

4.61

5.99

Accept Null

Lnindex Does Not Granger Cause Rate

F ( 1,40 ) =0.46

4.61

5.99

Accept Null

If 2 times F-values greater than critical values, we reject void.

From table 7, we can reason that in the slowdown of 1, at the 10 % and 5 % significance degree, stock monetary value ( Lnindex ) variable and pecuniary policy variables have no Granger cause relationship, so stock monetary value variable has no predict power to pecuniary policy variables, and besides pecuniary variables has no predict power to stock monetary value variables.

Table 8: Lag=4 Granger causality trial

Null Hypothesis

F-Values

Test Critical Values

Consequences

10 %

5 %

Lnloan Does Not Granger Cause Lnindex

F ( 4,31 ) =1.16

7.78

9.49

Accept Null

Lnindex Does Not Granger Cause Lnloan

F ( 4,31 ) =0.03

7.78

9.49

Accept Null

Lnm2 Does Not Granger Cause Lnindex

F ( 4,31 ) =0.89

7.78

9.49

Accept Null

Lnindex Does Not Granger Cause Lnm2

F ( 4,31 ) =0.16

7.78

9.49

Accept Null

Rate Does Not Granger Cause Lnindex

F ( 4,31 ) =0.62

7.78

9.49

Accept Null

Lnindex Does Not Granger Cause Rate

F ( 4,31 ) =0.28

7.78

9.49

Accept Null

If 2 times F-values greater than critical values, we reject void.

As presented on Table 8, in the slowdown of 4, at the 10 % and 5 % significance degree stock monetary value ( Lnindex ) variable and pecuniary policy variables still have no Granger cause relationship. We can non utilize pecuniary policy variable to predit plus monetary value variable, and frailty versa. This besides show that seting pecuniary policy variable affects stock market ‘s monetary value degree is really hard, even presuming it has the consequence, it must go through through a really long clip period, the consequence can be visual aspect.

2. Causality trial between pecuniary policy variables and house monetary values variable

I will analyse the causality relationship between house monetary values variable and pecuniary policy variables in the same manner above. Consequences are shown as Table 9 and Table 10

Table 9: Lag=1 Granger causality trial

Null Hypothesis

F-Values

Test Critical Values

Consequences

10 %

5 %

Lnloan Does Not Granger Cause Lnhsp

F ( 1,40 ) =3.58

4.61

5.99

Rejec Null

Lnhsp Does Not Granger Cause Lnloan

F ( 1,40 ) =0.13

4.61

5.99

Accept Null

Lnm2 Does Not Granger Cause Lnhsp

F ( 1,40 ) =2.74

4.61

5.99

Reject Null at 10 % Accept Null at 5 %

Lnhps Does Not Granger Cause Lnm2

F ( 1,40 ) =0.22

4.61

5.99

Accept Null

Rate Does Not Granger Cause Lnhsp

F ( 1,40 ) =1.57

4.61

5.99

Accept Null

Lnhsp Does Not Granger Cause Rate

F ( 1,40 ) =2.84

4.61

5.99

Reject Null at 10 % Accept Null at 5 %

If 2 times F-values greater than critical values, we reject void.

From table 9, we can reason: in the slowdown of one, at the 5 % significance degree, loan can Granger Cause house monetary value, but house monetary value does non Granger cause loan, these two variable merely hold uni-directional Granger cause relationship, house monetary value and other pecuniary variable have no Granger cause relationship. While at the 10 % significance degree, loan and boarder money supply can Granger Cause house monetary value, and besides house monetary value can Granger do Rate. This besides indicates that seting fiscal establishment loan and boarder money supply can hold certain consequence on house monetary value in short clip, based on quarterly informations, we can utilize fiscal establishment loan and boarder money supply to foretell the house monetary value in a certain period.

Table 10: Lag=4 Granger causality trial

Null Hypothesis

F-Values

Test Critical Values

Consequences

10 %

5 %

Lnloan Does Not Granger Cause Lnhsp

F ( 4,31 ) =2.32

7.78

9.49

Accept Null

Lnhsp Does Not Granger Cause Lnloan

F ( 4,31 ) =0.12

7.78

9.49

Accept Null

Lnm2 Does Not Granger Cause Lnhsp

F ( 4,31 ) =1.69

7.78

9.49

Accept Null

Lnhsp Does Not Granger Cause Lnm2

F ( 4,31 ) =0.36

7.78

9.49

Accept Null

Rate Does Not Granger Cause Lnhsp

F ( 4,31 ) =2.4

7.78

9.49

Accept Null

Lnhsp Does Not Granger Cause Rate

F ( 4,31 ) =2.44

7.78

9.49

Accept Null

If 2 times F-values greater than critical values, we reject void.

As presented on Table 10, in the slowdown of 4, we can see plus monetary value variables and pecuniary variables have no Granger causality relationship at 10 % and 5 % significance degree.

Synthesizes the above analysis, we can reason that the stock monetary value and pecuniary variables have no bipartisan causality relationship in short tally, and pecuniary policy have no impact on stock monetary value in short tally. But in some certain grade, loan and boarder money supply can Granger do house monetary value, it means that loan and boarder money supply can foretell house monetary value in short clip.

## 6. Decision

In this thesis, we study the relationship between plus monetary value and pecuniary policy in China by utilizing quarterly statistics during the twelvemonth of 1998 to 2008.

We use the stock monetary value ( index ) and house monetary value ( hsp ) as indexs of plus monetary value, and utilize boarder money supply ( M2 ) , fiscal establishment loan ( loan ) , existent rate ( rate ) as indexs of pecuniary policy. We expect those plus monetary value variables would hold some consequence on the pecuniary policy. Hence, we process these clip series through ADF-test, Cointegration-test and Granger causality trial to uncover the long-run and short-run relationship among them.

Then, from the consequences of cointegration trial, the consequences suggest that the indexs of plus monetary value have cointegration with pecuniary policy base on the quarterly informations during 1998 to 2008 in China, hence, it implies that there is long-run relationship between the fluctuations of plus monetary value market and pecuniary policy decision-making in China.

Further, we use Granger causality trial to exam the short term relationship. In the lag=1 and 4, the consequences reveal that stock monetary value variable and pecuniary policy variables have no causality relationship in short tally, stock monetary value variable has no predict power in pecuniary policy variables. But in some certain grade, that loan and boarder money supply can foretell house monetary value in short clip.

In drumhead, from analysis in this thesis, we can acquire some utile policy deductions in China.

First, bettering relevant conditions of plus monetary values and pecuniary policy transmittal mechanism.As China ‘s capital market development, plus monetary value transmittal channels to pecuniary policy bit by bit disappear. Although current recognition market and money market financess straight or indirectly to concentrate on the plus market, which so create chances for the pecuniary policy transmittal mechanism, but do non organize a valid investing and ingestion demand, to some certain extent, ensuing in deformation of the pecuniary policy transmittal mechanism. As money supply increasing, fiscal insistutions have sufficient financess, make loan enlarge, and besides cause rapid increasing in stock monetary value.

Dramatic fluctuations in plus monetary values, on the one manus resulted in fiscal system instability and, on the other manus, plus monetary value transmittal channels to pecuniary policy is besides non really smooth. However, as the stock market, house monetary value and other assets further development, the consequence of traditional pecuniary policy transmittal mechanism will bit by bit decrease, the function of plus monetary value transimitted to pecuniary policy will play an of import function, so now we must better relevant conditions of plus monetary values and pecuniary policy transmittal mechanism by Tobin q consequence, the wealth consequence, balance sheet effects and many other channels.

Second, Monetary policy should concentrate on plus monetary value fluctuation. The plus monetary value has non been able to take as the independent ordinance mark of the pecuniary policy, but should take it as the subsidiary proctor mark of currency ordinance, integrates to the field of the Central Bank pecuniary policy Central Bank.The cardinal bank should set up index system comparative to plus monetary value monitoring, and do corresponding respond to gauge the impact of market motion and alteration of plus monetary value on macro economic fluctuation, so find the tendency of pecuniary policy, implements the indispensable regulatory behavior, meanwhile, the cardinal bank must clear up the dazes of plus monetary value fluctuation.

Third, the cardinal bank should concentrate on the impact of the existent estate market on existent economic system. Empirical consequences show that lodging monetary value has played a certain function in the transmittal mechanism of pecuniary policy in China, the correlativity with pecuniary policy variable is highly high. The cardinal Bankss should concentrate on the alteration of existent estate market because the existent estate industry is pillar industries, the existent estate market monetary value fluctuation will impact our investings, farther to fluctuations in related industries, to even worse, it may impact the whole macro economic system development. Consequently, the Government should concentrate on impact of the existent estate market on macro economic system.