The Evolution of Monetary Rules with Financial Stability Considerations
37 Pages Posted: 8 Jan 2021 Last revised: 23 Oct 2022
Date Written: November 16, 2020
Abstract
In this study, we estimate and investigate the evolution of monetary rules in China and the United
States in the 21st century. Our goal is to examine whether financial stability has been taken
into consideration in the decision-making of monetary policy. By proposing a new method, we
estimate the structural breaks, split the entire time period into multiple monetary regimes, and
estimate an extended Taylor rule with financial stability considerations and its evolution over
time. Our findings show that China’s monetary policy emphasized the financial stress of the U.S.
immediately before and during the 2008 global financial crisis. However, the coefficient for the
U.S. financial stress has decreased since then, which shows a weaker concern on this index,
and instead, the Chinese policymakers are emphasising stronger on their domestic financial
market.
Keywords: Taylor Rule, Financial crisis, Financial stability, Structural break, Monetary policy
JEL Classification: E32, E42, E58, G38
Suggested Citation: Suggested Citation