Does the Monetary Policy Intervention of China's Central Bank on Asset Prices Take on Asymmetric Preferences?——An Theoretical and Empirical Research based on a Linex Loss Function of Central Banks

Abstract

Abstract:

Based on an asymmetric central banks' loss function of Linex functional form and an expanded forward-looking IS-Philips framework, this paper demonstrates central banks' asymmetric preference towards asset price fluctuations and the consequent asymmetric monetary policy rules. Employing China's housing price data and stock price data, the paper empirically tests the Euler equation which describes the asymmetric preferences of central banks. The research results imply that, China's central bank has significant asymmetric preference towards asset price fluctuations. To be specific, it prefers upward departures of asset prices against their equilibrium value rather than downward departures. The asymmetric preference induced interest rate bias calculated through estimated parameters reveals that central banks' asymmetric preference towards asset price fluctuations will induce a downward bias of the benchmark interest rate, thus causing potential financial risks consequently.

Key words: monetary policy, asset prices, asymmetric preferences

Zheng Guanqun, Xu Yan. Does the Monetary Policy Intervention of China's Central Bank on Asset Prices Take on Asymmetric Preferences?——An Theoretical and Empirical Research based on a Linex Loss Function of Central Banks[J]. , 2020, 32(2): 53-62.

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