Financial cycle and the effect of monetary policy

Chuang Deng, Xiuyi Zhao and Man Xu

Finance Research Letters, 2022, vol. 47, issue PA

Abstract: Using a time-varying parameter vector vector autoregressive model with stochastic volatility (TVP-SV-VAR), this study evaluates the effect of quantitative and price-based monetary policies on China's financial cycle, which is represented by a dynamic financial condition index (FCI) constructed with a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model. Results reveal that quantitative monetary policy boosts the financial cycle slightly and swiftly, whereas price-based monetary policy has slower but stronger long-term negative effect to restrain boom and control financial risk. Moreover, the effects of both monetary policies are compromised in periods of strong financial fluctuation.

Keywords: Monetary Policy; Financial Cycle; TVP-FAVAR Model; SV-TVP-VAR Model (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612321005237

DOI: 10.1016/j.frl.2021.102570

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