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

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.