Modeling the Effects of Coordinating Macro-Prudential Rule and Monetary Policy
Xiaowen Hu, Chengchen Hu, Zhixiang Tang, and Zhen Li
School of Economics and Management, Anhui Normal University
189 Huajin South Road, Wuhu city, Anhui 241002, China
We develop a new Keynesian model featuring a dual-pillar monetary policy. We employ this framework to analyze the effects of coordinating macro-prudential rule and monetary policy in China using different tools. The simulation results show that: (1) adopting macro-prudential rule and monetary policy simultaneously can achieve a more stable economic environment than using monetary policy alone; (2) a price-based monetary policy is more effective in stabilizing economic fluctuations than a quantity-based monetary policy when considering the macro-prudential policy; (3) the combination of quantity-based monetary policy and macro-prudential rule can stabilize housing prices and credit growth better than the price-based tools. The study shows that when house prices rise rapidly owing to external shocks, adopting the quantity-based policy instruments and macro-prudential policy is a wise choice. When the financial condition is stable, the combination of price-based instruments and macro-prudential rule is better.
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