The Evolution of Monetary Rules with Financial Stability Considerations

37 Pages Posted: 8 Jan 2021 Last revised: 23 Oct 2022

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 in the 21st century. Our goal is to examine whether financial stability has been taken
into consideration in the decision-making of monetary policy. By proposing a new method, we
estimate the structural breaks, split the entire time period into multiple monetary regimes, and
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.
immediately before and during the 2008 global financial crisis. However, the coefficient for the
U.S. financial stress has decreased since then, which shows a weaker concern on this index,
and instead, the Chinese policymakers are emphasising stronger on their domestic financial
market.

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://sites.google.com/site/xiedanxia/

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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