Using the structural vector autoregression model, we estimate the current responses of monetary policy to contemporaneous shocks from macroeconomic variables. Our findings indicate that the People's Bank of China responded to inflation and output changes, but did not react to asset price fluctuations during the period from The optimal monetary responses to exogenous shocks are also examined. It is revealed that using asset prices to formulate monetary policy would not help to improve monetary authorities' performance in lowering the volatilities of output growth and inflation while keeping output growth and inflation in their safety zones. The effectiveness of monetary policy and fiscal policy in reacting to external shocks is also discussed.
crisis in 2008.However, the transmission mechanism existing among asset prices, commodity prices and real output is rather complex, and it is difficult to assert the direction and magnitude of impact of asset price movements on the real economy. According to the survey conducted by Mishkin (2001), rising asset prices can enhance investment and consumption through channels such as the widely quoted Tobin's Q effect and the household wealth effect.However, the crowding-out effect of the asset price on consumption and investment should not be neglected in the short run (Tobin, 1965). Optimal
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