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Identifying the Interdependence Between Monetary Policy and Financial Stress: Evidence from China
Author(s) -
Li Rong,
Tian Xiaohui
Publication year - 2018
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12174
Subject(s) - economics , simultaneity , monetary policy , vector autoregression , index (typography) , shock (circulatory) , monetary economics , china , financial market , point (geometry) , macroeconomics , finance , medicine , physics , geometry , mathematics , classical mechanics , world wide web , computer science , law , political science
We estimate the interdependence between Chinese monetary policy and financial stress using structural vector autoregression. To solve the simultaneity problem, we employ a strategy including both short‐run and long‐run restrictions that maintains the qualitative properties of monetary policy shocks derived from the literature. This method is applied to Chinese monthly data, together with a newly constructed index of financial stress in this paper. Our findings suggest there exists strong interdependence between monetary policy and financial stress. The financial stress index increases immediately by 0.4 of its standard deviation after a monetary policy shock that raises the M2 growth rate by 1 percentage point. An increase of financial stress by one standard deviation leads to a decline in the M2 growth rate by 2 percentage points.