The Evolution of Monetary Rules with Financial Stability Considerations

33 Pages Posted: 8 Jan 2021 Last revised: 10 Sep 2021

See all articles by Yao Hou

Yao Hou

Tsinghua University - Institute of Economics

Rong Li

Tsinghua University

Danxia Xie

Tsinghua University - Institute of Economics

Longtian Zhang

Central University of Finance and Economics

Tony Zhang

University of Illinois Urbana Champaign

Date Written: November 16, 2020

Abstract

In this study, we estimate and investigate the evolution of monetary rules in China and the United
States during the 21st century. Our aim is to examine whether financial stability has been taken
into consideration in practical monetary policy decision making. By proposing a new estimation method that combines the structural break estimation technique with an extended Taylor
rule, we can estimate structural breaks and split the entire time period into multiple monetary
regimes based on the macroeconomic data for both China and the U.S. Specifically, we in fact
estimate an extended Taylor rule with financial stability considerations and its evolution over
time. Our findings show that China’s monetary policy emphasized the financial stress of the
U.S. in the early years, before and during the 2008 global financial crisis. However, since then,
the coefficient for the U.S. financial stress has decreased since then, showing less consideration
for the U.S. financial stability and more emphasis on the domestic financial market by Chinese
policymakers.

Keywords: Taylor Rule, Financial crisis, Financial stability, Structural break, Monetary policy

JEL Classification: E32, E42, E58, G38

Suggested Citation

Hou, Yao and Li, Rong and Xie, Danxia and Zhang, Longtian and Zhang, Qingquan, The Evolution of Monetary Rules with Financial Stability Considerations (November 16, 2020). Available at SSRN: https://ssrn.com/abstract=3731159 or http://dx.doi.org/10.2139/ssrn.3731159

Yao Hou

Tsinghua University - Institute of Economics ( email )

MingZhai Building
Beijing, 100084,100084
China

Rong Li

Tsinghua University ( email )

Beijing, 100084
China

Danxia Xie (Contact Author)

Tsinghua University - Institute of Economics ( email )

MingZhai Building
Beijing, 100084
China

HOME PAGE: http://danxiaxie.com

Longtian Zhang

Central University of Finance and Economics ( email )

Shahe Higher Education Park
Changping District
Beijing, Beijing 102206
China

HOME PAGE: http://longtianzhang.com

Qingquan Zhang

University of Illinois Urbana Champaign ( email )

Champaign, IL 61820
United States
6128406736 (Phone)
61820 (Fax)

HOME PAGE: http://https://giesbusiness.illinois.edu/profile/qingquan-zhang

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