Systemic risk: The coordination of macroprudential and monetary policies in China

Abstract The literature documents the effects of monetary and macroprudential policies in controlling systemic risk, but empirical evidence of a systemwide framework that effectively coordinates the two policies is lacking. This study assesses the effectiveness, channels, and timeliness of monetary and macroprudential policies’ impacts on systemic risk in China from January 2009 to June 2018, and contributes to the discussion of how to coordinate these policies. Using an index synthesized from 28 indicators to proxy China’s systemic risk, we find the following: (1) A contractionary monetary (macroprudential) shock increases (reduces) systemic risk over the entire shock time period. (2) Macroprudential (monetary) policy is effective in the long (short) term. (3) The systemic risk intervention effect of monetary (macroprudential) policy is channeled through inflation control (asset price stability).