China’s Monetary and Macroprudential Policies: Are They Complementary or Substitutive?

Abstract

This paper develops a calibrated dynamic stochastic general equilibrium model incorporating a banking sector and some unique features of China’s macroeconomic policies to simulate China’s monetary and macroprudential policies. The quantitative results show, first, that the interest rate is a better instrument for China’s monetary policy than the required reserve ratio (RRR) when the central bank is solely concerned about price stability; second, that the loan-to-value ratio is a very useful macroprudential tool for China’s financial stability, and the RRR could be used as an instrument for both objectives; third, monetary and macroprudential policies could be either complements or substitutes in China, depending on the choices of instruments for the two policies. Our policy experiments recommend three combination choices of instruments for China’s monetary and macroprudential policies. (JEL codes: E52, E61and G18)