| Abstract | “Controlling leverage” has become one of the key goals of China’s monetary policy in recent years, along with “maintaining a stable growth”. By building a model incorporating financial sector and central bank under the framework of DGE, this paper finds that the optimal money growth under the dual goals is negatively affected by the weight of “controlling leverage”, the goal of “maintaining a stable growth”, output’s sensitivity to money, and leverage ratio, while positively impacted by capital stock and interest rate elasticity of money demand. And the optimal money growth is highly sensitive to the weight of “controlling leverage”, the goal of “maintaining a stable growth”, leverage ratio and interest rate elasticity of money demand. Therefore, it is highly difficult to achieve the optimal money growth in a timely way, suggesting significant risks of policy error. As a result, monetary policy should not pursue these two goals at the same time. Administrative controls are needed in the short term to more effectively control leverage, while structural reforms are indispensable to fundamentally resolve the elevated leverage ratio. |