Abstract

In recent years, the monetary conditions of major economies all around the world have a significantcharacter, whose macro liquidities were obvious excessive during 2001 to 2007, but this trend was reversed sharply to extremely shortage of liquidity because the real economy gradually stuck in the recession after the explosively outburst of subprime mortgage financial crisis in the second half year of 2007. Meanwhile, the excess liquidity and its sharp downturn to shortage was widely considered as the principal reason of magnified volatility of inflation and asset prices. What is the effect and mechanism of the condition of macro liquidity, excess or shortage, on inflation and asset prices, and to what extent was the effect? What was the origin of the excess liquidity, or liquidity shortage? Did it rooted in the monetary authorities' mis-ajustment because of the unstable monetary supply and demand functions, or the spill-over of the external monetary liquidity condition, or the endogenous liquidity creation mechanism which origins from the dynamic adjustment behaviors based on sectoral balance sheets by the economic sectors? What was the function played by the boom and bust of asset prices and inflation expectation during the downturn of liquidity from excess to shortage?Were the monetary policy and fiscal policy adopted effective, given the different kinds of excess liquidity origins? All above questions are theoretical and realistic problems of great value, especially facing the international complicated financial crisis and turbulence and recession of major economies nowadays.

Firstly, we take a glance of the monetary liquidity conditions of ten countries or economies during 1999 to 2008, and have a preparatory analysis of the relation between liquidity, inflation and asset prices. Based on the measure of “Marshall K”, we define and measure the liquidity and the extent of excess liquidity or liquidity shortage. Using the historic data, we conduct empirical analysis of the statistical effect of excess liquidity on inflation and asset prices, which samples globally, including ten major countries and the economy groups of emerging countries BRIC and developed countries G6. Based on the discrete choice model Probit, we analyze the probability of the event: excess liquidity triggers inflation and asset price boom, which is taken for granted in common sense. Upon the conclusion, we find that, in despite of inconspicuous statistical evidence, sustained excess liquidity, real economic growth, demonstration effect of risky asset prices boom, real interest rate keeping low level, numbers of countries having excess liquidity simultaneously and period of excess liquidity lasting, all significantly make a positive contribution to the probability of the hypothetical event. At the same time, we find the changed trend of excess liquidity leading role, from developed countries to emerging countries, and obviously this had a significant effect on inflation. Due to the lack of recent data, we cannot find the evidence that subprime mortgage financial crisis have an actual effect.

Focused on the significant characters shown by Chinese monetary excess liquidity during 2005 to 2008, we model the monetary demand and supply functions separately, and include the asset prices and inflation endogenously in a simultaneous equations framework with goods, money and credit markets involved. From the point of view that excess liquidity or liquidity shortage origins from the non-equilibrium of monetary demand and supply, which could give us a clearer deep cause of the change of monetary liquidity conditions. Within this analytical framework, we review the effect on excess liquidity of various exogenous variables, such as external shock, policy basket adopted by monetary authorities and voluntary behaviors adopted by commercial banks. Furthermore, we carefully scrutinize the role played by inflation and asset prices during the change of liquidity conditions. Based on the empirical and simulation results, we can finally draw the conclusions that various external shocks happened in the second half year of 2008, such as sharp reversion of global liquidity, collapse of major international commodity prices, reversion of expectation of RMB exchange rate from appreciation to depreciation, change of interest rate in major economies and dramatic variation of international short-term capital flow（especially hot money），all driven lack of actual money supply comparing to the aim of monetary authorities set, and eventually emerged the reversion from excess liquidity to liquidity shortage.

The last part of analysis goes into the deeper view of sectoral economy; we relate the change of monetary liquidity conditions with the sectors'assets/liabilities adjustment behaviors. We take this research angle because the micro-foundation of sectoral change of asset allocation behaviors can more accurately reveal the real monetary conditions than the measures based on the macro monetary variables. We finally construct the Stock-Flow Consistent Analysis（SFCA）model with six sectors, according to the characters of American economy. Followed by standard dynamic simulation procedures, we analyze the effect and relative importance of various external shocks, such as real economy variables, expectation variables policy instruments, on the American's household sector's change of assets allocation behavior.