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Systemic risk: The coordination of macroprudential and monetary policies in China

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  • Zhang, Ailian
  • Pan, Mengmeng
  • Liu, Bai
  • Weng, Yin-Che

Abstract

The literature documents the effects of monetary and macroprudential policies in controlling systemic risk, but empirical evidence of a systemwide framework that effectively coordinates the two policies is lacking. This study assesses the effectiveness, channels, and timeliness of monetary and macroprudential policies’ impacts on systemic risk in China from January 2009 to June 2018, and contributes to the discussion of how to coordinate these policies. Using an index synthesized from 28 indicators to proxy China’s systemic risk, we find the following: (1) A contractionary monetary (macroprudential) shock increases (reduces) systemic risk over the entire shock time period. (2) Macroprudential (monetary) policy is effective in the long (short) term. (3) The systemic risk intervention effect of monetary (macroprudential) policy is channeled through inflation control (asset price stability).

Suggested Citation

  • Zhang, Ailian & Pan, Mengmeng & Liu, Bai & Weng, Yin-Che, 2020. "Systemic risk: The coordination of macroprudential and monetary policies in China," Economic Modelling, Elsevier, vol. 93(C), pages 415-429.
    • Handle: RePEc:eee:ecmode:v:93:y:2020:i:c:p:415-429
    DOI: 10.1016/j.econmod.2020.08.017
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    2. Olszak, Małgorzata & Kowalska, Iwona, 2022. "Does bank competition matter for the effects of macroprudential policy on the procyclicality of lending?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
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    4. Nguyen, Hoai Thi Thanh & Tram, Huong Thi Xuan & Nguyen, Linh Thi Thuy, 2023. "Interest rates and systemic risk:Evidence from the Vietnamese economy," The Journal of Economic Asymmetries, Elsevier, vol. 27(C).
    5. Iwanicz-Drozdowska Małgorzata & Kurowski Łukasz, 2021. "Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances," German Economic Review, De Gruyter, vol. 22(4), pages 383-414, November.
    6. Dzhagityan, E. & Alekseeva, M., 2024. "The effect of macroprudential policy on risks of U.S. bank holding companies," Journal of the New Economic Association, New Economic Association, vol. 63(2), pages 168-191.

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    More about this item

    Keywords

    Systemic risk; Monetary policy; Macroprudential policy; TVP-VAR-SV model;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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