ABSTRACT
This article effectively identifies the high and low volatility state of asset prices in China by constructing the MS-AR model, and further investigates the relationship between different dimensions of liquidity and asset price volatility. Moreover, we try to incorporate liquidity into the analytical framework and adopt the TVP-SV-VAR model to study the time-varying characteristics between monetary policy, liquidity, asset price volatility and macroeconomy. The results are as follows: firstly, it shows that the high or low volatility state of China’s stock market and real estate market can be clearly divided, and display the consistency with the trend of asset price volatility. Secondly, liquidity has a strong ability to explain the high and low volatility state of asset prices, but it shows some hysteresis effects. Thirdly, the time-varying results reveal that monetary policy has a regulating effect on liquidity, and the response cycle of quantitative monetary policy is relatively short, which reflects the effects of macroeconomy precisely. However, price-based monetary policy has a longer response cycle and plays a vital role in the anticipatory adjustment and fine-tuning of asset price volatility. These conclusions can provide an explanation for the attention to asset price bubbles and potential financial risks, and offer decision-making references for the central bank to implement differentiated and dynamic monetary policy choices.