The dynamic impact of monetary policy on financial stability in China after crises

This research investigates the role that China's monetary policy has played in maintaining financial stability after crises in the 21st century. We construct a financial stability index (FSI) with eight variables from four characteristics that reflect variations in the financial stability of China, and analyze the dynamic impacts of China's monetary policies on financial stability with a time-varying parameter vector-autoregressive (TVP-VAR) model. The three major crises that China has been involved in the past 15 years (i.e., the 2008 global financial crisis, 2015 stock market crash in China, and the ongoing COVID-19 crisis) indicate that the scale of social financing, stock market performance, and the degree of financial deepening in China have great influences on financial stability. We observe supportive evidence, moreover, that both quantitative and price-based monetary policies can promote financial stability after crises in China, especially in the short term. The quantitative policy is more effective than price-based monetary policy and has become the main policy tool in China. At a time when the world economy is still suffering from the COVID-19 crisis, the quick economic recovery is an imperative task for all countries. It is of great theoretical and practical significance to understand the relationship between monetary policy and financial stability after crises.