Study on Monetary Policy Rules with Financial Stability Factor

Yin Zhong Liu Jingquan Zhang Xiaoyu

Abstract: In this paper, under the constraints of the aggregate demand and the aggregate supply curve, we use the dynamic optimization method to get the nominal interest rate adjustment rules of the central bank with“the inflation gap”and“the inflation gap and output gap”re-spectively. The results show that compared with the discretionary rule, regular monetary policy rule loses smaller social welfare, which is the optimal monetary policy choice. On this basis, we construct the financial stability index and use the generalized moment method to estimate the regular linear interest rate rules which introduce financial stability factors. The results show that in the implementation of monetary policy, China's central bank does not pay much atten-tion on the financial stability gap, this is due to the amateur level of interest rate marketization in China, and the impact channels of monetary policy on the financial market is not smooth e-nough. Therefore, while carrying out financial market regulation, the central bank is more likely to take administrative methods to intervene, and as China's interest rate marketization process continues to accelerate, using market-oriented methods to regulate financial markets is the key to future financial market stability mechanism.

Key Words: Monetary Policy Rules Financial Stability Index GMM Estimation