Optimal Monetary Policy Rule with the Target of Financial Stability and Its Test in China
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| Title | Optimal Monetary Policy Rule with the Target of Financial Stability and Its Test in China
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| Author | Deng Chuang and Xu Man |
| Organization | Center for Quantitative Economics of Jilin University, Business School of Jilin University |
| Email | dengchuang@jlu.edu.cn；manxu15@mails.jlu.edu.cn |
| Key Words | Financial Conditions Index; Monetary Policy Rule; Financial Stability; Inflation; TVP-FAVAR Model |
| Abstract | Based on multidimensional financial index system, this paper employed factor augmented vector autoregressive models with time-varying parameter to calculate the dynamic financial conditions index in China, which is used to measure the fluctuation of financial conditions and included in the target system of monetary policy. Combining with the reaction mechanism of monetary policy to economic and financial fluctuation, we empirically tested the adaptability of the optimal monetary policy rules containing the target of financial stability in China. The results show that, the optimal monetary policy rules containing the targets of both economic and financial stability can reduce the bias that occurs when traditional monetary policies respond to the price and output fluctuations; compared to the period before the financial crisis, China's monetary policy paid more attention to financial fluctuations and less attention to the price and output fluctuations during the post-crisis era. These studies provide a useful empirical basis and policy implications for the further improvement of monetary policies’ scientificity and effectiveness and the realization of both macroeconomic and financial stability. |
| Serial Number | WP1311 |
| Time | 2018-12-04 |
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