Estimating Treatment Effects of Monetary Policies and Macro-prudential Policies: From the Perspectives of Macro-economic Policy Evaluation

The main goal of macro prudential policies is to maintain financial stability. Macro prudential policy framework is a dynamic one, consisting of capital requirements, leverage ratio, liquidity requirements, etc. The concept of macro prudential, developed mainly after the 2008 financial crisis, is the counterpart to micro prudential. Micro prudential policies focus on individual financial institutions, believing that the stability of individual financial institutions could guarantee the stability of the entire financial system. With the outbreak of the financial crisis in 2008, people realized that the sum of micro prudential was not equal to macro prudential, and the sum of healthy micro entities could not guarantee a healthy macro whole. Therefore, many countries and international organizations began to focus on the whole financial system and the macro prudential policy framework came into being. Just as the effectiveness of monetary policies is the core issue in the research of monetary policy theory, the effectiveness of macro prudential policies is also the core issue in the research of macro prudential theory. Existing research generally believes that specific macro prudential policy is effective for the specific objective, such as macro prudential policies for credit could effectively reduce the systemic risk caused by increased credit or asset prices rise (Lim et al. (2011), Dell'Ariccia et al. (2012), Cerutti et al. (2017), Akinci and Olmstead-Rumsey (2018), Fang Yi (2016), Liang Qi et al. (2015)). However, as pointed by Lim et al. (2011) and Dell'Ariccia et al. (2012), the highly targeted characteristic of macro prudential policies would lead to the transfer of risks to sectors with weak supervision due to regulation and cross-border arbitrage, which may lead to more serious consequences. Therefore, it is of great theoretical value and practical significance to explore the effectiveness of macro prudential policies from the perspective of overall financial stability and systemic financial risk. The aim of this paper is to empirically evaluate the effects of the macro prudential policies on financial stability in China. Firstly, the paper proposes adopting the macro-econometric policy evaluation method under the Rubin causal effect framework to evaluate the impact of China's macro prudential policies on financial stability during the sample period 2007-2020. The method is a new route to empirically evaluate macroeconomic policy effects. Different from the panel data methods and micro-level data analyses used in existing studies, the method can evaluate the combined effects of various macro prudential tools for a specific country. Secondly, based on the macro prudential databases of Shim (2013) and Global Macro prudential Policy Instruments (GMPI) survey database of IMF during 2013- 2014, the paper comprehensively explores the practice of macro prudential policies in China since 2000, and constructs a monthly macro prudential policy index to quantitatively measure the intensity of China's macro prudential policies for the period from January 2000 to May 2022. Thirdly, the paper uses the systemic financial risk index, termed as SRISK proposed by Brownlees and Engle (2017), to measure China's systemic financial risk. And then evaluates the macro prudential policies' effects on the systemic financial risk, cross-sectoral contagion of systemic financial risk and important intermediate variables in the credit channel. Our empirical findings indicate that loose macro prudential policies can increase the risks of intermediate variables in the credit channel, and the risks lead to a significant rise in SRISK of house sector, but for the SRISK of financial and manufacturing sectors, the cumulative effects in 24 periods are not significant. However, in addition to a significant rise in commercial banks' capital adequacy ratio growth, tight macro prudential policies have no significant effects on the other intermediate variables in the credit channel, and further have no obvious effects on SRISK of financial, house and manufacturing sectors. Based on the conclusions, we suggest that systemic risk indicators should be further researched to provide more comprehensive and systematic targets for macro prudential authorities. Moreover, the transmission channel of macro prudential policies on financial stability should be improved to enhance the efficiency of regulation. Finally, more attentions should be paid to the cross-sectoral contagion of systemic financial risk to prevent systemic financial risk from a systemic perspective.