Financial Stability and Sustainability under the Coordination of Monetary Policy and Macroprudential Policy: New Evidence from China

Ying Jiang,Jizhou Zhang,Xiaoyi Zhou,Chong Li

doi:10.3390/su11061616

Ying Jiang, Jizhou Zhang + Show 2 more

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https://doi.org/10.3390/su11061616

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Journal: Sustainability	Publication Date: Mar 18, 2019
Citations: 15	License type: CC BY 4.0

Affiliation: Duke University, Sichuan University

Abstract

After the financial crisis, financial stability and sustainability became key to global economic and social development, and the coordination of monetary policy and macroprudential policy plays a crucial role in maintaining financial stability and sustainability. This paper provides a theoretical analysis and empirical evidence from China on the impact of monetary policy and macroprudential policy coordination on financial stability and sustainability. We collect data from 2003 to 2017; from the micro level, we use the System Generalized Method of Moments (System GMM) method to analyze the monetary policy and macroprudential policy coordination effect on 88 commercial banks’ risk-taking; from the macro level, we use the Structural Vector Autoregression (SVAR) method to analyze the two policies coordination effect on housing prices and stock price bubbles. The conclusions are as follows: firstly, for regulating bank risk-taking, monetary policy and macroprudential policy should conduct counter-cyclical regulation simultaneously; secondly, for regulating housing prices, tight monetary policy and tight macroprudential policy should be implemented alternately; thirdly, for regulating stock price bubbles, macroprudential policy should be the first line of defense and monetary policy should be the second one.

Highlights

After the 2008 financial crisis, financial stability and sustainability have become the key to global economic development, and monetary policy only focusing on price stability has proved inadequate for maintaining financial stability and sustainability
N’Diaye studied how macroprudential policy supported monetary policy when aiming at reducing output fluctuation and maintaining financial stability at the same time, and the results showed that countercyclical macroprudential policy helped reduce the output fluctuation and reduce the risk of financial instability, and it can curb asset price volatility and financial accelerate process well [17]
Luo and Cheng studied the coordination between monetary policy and macroprudential policy with the goal of controlling housing prices, and the results showed that macroprudential policy could make up for the deficiency of monetary policy in regulating the real estate market

Summary

Introduction

After the 2008 financial crisis, financial stability and sustainability have become the key to global economic development, and monetary policy only focusing on price stability has proved inadequate for maintaining financial stability and sustainability. In this context, macroprudential policy aimed at preventing systemic risk by restraining the excessive risk-taking of financial market participants beforehand becomes another important guarantee for financial stability and sustainability in the post-crisis era. This study analyzes the impact of the coordination of China’s monetary policy and macroprudential policy on important financial stability and sustainability indicators: bank risk-taking and asset prices from the micro and macro levels. The aim is to conclude the coordination effect of monetary policy and macroprudential policy in China and to provide some inspiration on financial stability and sustainability around the world

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Results

Conclusion