The evolution of monetary rules with financial stability considerations

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 emphasizing stronger on their domestic financial market.

KEYWORDS:

• Taylor Rule
• Financial crisis
• Financial stability
• Structural break
• Monetary policy

JEL CLASSIFICATIONS:

• E32
• E42
• E58
• G38

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ China’s central bank is known as the People’s Bank of China, and PBOC will henceforth be used.

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [71973075, 71973076].