The Evolution of Monetary Rules with Financial Stability Considerations

In this study, we estimate and investigate the evolution of monetary rules in China and the UnitedStates during the 21st century. Our aim is to examine whether financial stability has been takeninto consideration in practical monetary policy decision making. By proposing a new estimation method that combines the structural break estimation technique with an extended Taylorrule, we can estimate structural breaks and split the entire time period into multiple monetaryregimes based on the macroeconomic data for both China and the U.S. Specifically, we in factestimate an extended Taylor rule with financial stability considerations and its evolution overtime. Our findings show that China’s monetary policy emphasized the financial stress of theU.S. in the early years, before and during the 2008 global financial crisis. However, since then,the coefficient for the U.S. financial stress has decreased since then, showing less considerationfor the U.S. financial stability and more emphasis on the domestic financial market by Chinesepolicymakers