The Adaptability Of The Raylor Rule Which Condiders Financial Stress In China

The US subprime mortgage crisis was burnt out in August2007.Before the crisis exploded, the inflation rate of US is in a stable and low level, which was inconsistent with the theory of monetary stability and financial stability are consistent. This phenomenon gave the idea that monetary stability couldn’t lead to financial stability. So, scientists started to study taking the factor of financial stability into the frame of Monetary Policy. China hasn’t formed a generally accepted monetary policy rule. With the problem of financial risk becomes more significant, it’s necessary to explore a monetary policy rule which takes the financial stability into consideration and is suitable to China.On the basis of a systematic review of the research about Monetary Policy and financial stability, this paper demonstrates that Monetary Policy needs to take into consideration of financial stability through discussing the conduction mechanism of Monetary Policy in bank, security and foreign exchange sectors. So, this paper constructs a comprehensive index-Financial Stress Index, which contains systematic risk of bank, security and foreign exchange sectors, can reflect the condition of financial stability very well. This paper develops Taylor rule by introducing Financial Stress Index. This paper makes a time-invariant parameter estimation of the model mentioned above by GMM. Since the Monetary Policy may change and the severe financial stress happens occasionally, this paper makes a time-varying parameter estimation of the model mentioned above by state-space model which is amended by two-steps Kalman filter. On the basis of the result of time-varying parameter estimation, this paper also makes a time-divide estimation.The result show that the Monetary Policy in China is an unstable one, it reacts to the inflation gap insufficiently.So the Taylor rule just provides a reference to China’s Monetary Policy.And the response of Monetary Policy to financial stress is more likely a discretionary one, the Monetary Policy reacts to financial stress when the financial stress is severe, doesn’t make reaction when the financial stress is low.