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Coordination between Monetary Policy and Macro-prudential Supervision in China

【Authors】
XU Haixia, LV Shoujun
【WorkUnit】
Shanghai Jiao Tong University, 200030.
【Abstract】

Our paper analyzes the impact of monetary policy and macro-prudential supervision on economic cycle, welfare improvement and financial stability by using a DSGE model with collateral constraints. After the simulation test of China’s economy, we find that LTV macro-prudential rules can reduce welfare losses. The two policies could promote each other in the face of demand shocks, and conflicts may exist in the face of supply shocks. The modified Taylor curve with financial stability further shows that coordination between these two policies could enhance economic system’s stability significantly. Consequently, China’s policy makers should play full roles on the coordination of monetary policy and macroprudential supervision in macroeconomic regulation, so as to achieve economic and financial stability together.

JEL:E32, E58, G28

【KeyWords】
Monetary Policy, Macro-prudential Supervision, LTV Rules, Welfare Gains, Financial Stability