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Divergent impacts of quantity versus price-based monetary policies on banking systemic risk: Evidence from China

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  • Yichao Mo
  • Weihong Sun
  • Youqiang Ding
  • Li Wang

Abstract

This study investigates the effects of price-based (PMP) and quantity-based monetary policies (QMP) on systemic risks within China’s banking sector. We identify exogenous components of PMP and QMP by isolating explicit structural shocks in a structural vector autoregression model. Systemic risks are categorized into bottom-up risks, which assess how the distress or default of a single bank can contribute to systemic vulnerabilities, and top-down risks, which evaluate the likelihood of a bank experiencing distress during financial market turbulence. Utilizing a smooth local projection model, we analyze the impact of PMP and QMP on these two types of systemic risks. Our findings reveal that contractionary PMP shocks exacerbate bottom-up systemic risks while mitigating top-down risks. In contrast, contractionary QMP shocks initially elevate but subsequently diminish bottom-up risks, with minimal impact on top-down risks. Importantly, PMP affects state and non-state banks differently, decreasing top-down risks in state banks but increasing them in non-state banks. This differential impact indicates that the risk-taking behavior of non-state banks triggered by contractionary PMP can spill over, amplifying the damage of financial distress for both state and non-state banks.

Suggested Citation

  • Yichao Mo & Weihong Sun & Youqiang Ding & Li Wang, 2025. "Divergent impacts of quantity versus price-based monetary policies on banking systemic risk: Evidence from China," PLOS ONE, Public Library of Science, vol. 20(5), pages 1-23, May.
    • Handle: RePEc:plo:pone00:0322709
    DOI: 10.1371/journal.pone.0322709
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    References listed on IDEAS

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    1. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    2. Kabundi, Alain & De Simone, Francisco Nadal, 2020. "Monetary policy and systemic risk-taking in the euro area banking sector," Economic Modelling, Elsevier, vol. 91(C), pages 736-758.
    3. Mathias Drehmann & Nikola Tarashev, 2011. "Systemic importance: some simple indicators," BIS Quarterly Review, Bank for International Settlements, March.
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