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THE NONLINEAR TIME-VARYING EFFECTS OF QUANTITATIVE AND PRICE-BASED MONETARY POLICY INSTRUMENTS ON BANKING SYSTEMIC RISKS⁷
Zhenjiang Dou, Jingyi Wang, Cong Zhang, Weiyi Luo

ABSTRACT. Monetary policy and financial stability have been the focus of academic attention in recent years. Monetary policy instruments are mainly divided into quantitative and price-based types, which are heterogeneous to the mechanism and effect of systemic risk. To explore the heterogeneity of the influence of two types of monetary policy instruments on banking systemic risks, using the high-frequency return data of 16 listed commercial banks in China from January 2007 to September 2018, the long-run marginal expected shortfall method was used to measure the banking systemic risks, and on this basis, a currency combination model of the time-varying parameter factor-augmented vector autoregression was constructed. A comparative analysis of the nonlinear time-varying effects of the two types of monetary policy instruments on the systemic risks of the banks mentioned above at different macroeconomic stages was performed. Results show that monetary policy regulation has a prominent effect on banking systemic risks. The banking systemic risks tend to increase under a loose monetary policy environment regardless of whether the monetary policy instrument is quantitative or price-based type. Furthermore, the influence of monetary policy adjustment on bank systemic financial risks has nonlinear time-varying characteristics. That is, the influence of the same monetary policy instrument on banking systemic risks has nonlinear time-varying characteristics under different macroeconomic environments. The quantitative and price-based monetary policy instruments have different effects on banking systemic risks. In comparison with quantitative monetary policy instruments, the impact of price-based monetary policy instruments is greater. The conclusions have important reference value for preventing systemic financial risk.

KEYWORDS:  monetary policy, banking systemic risks, time-varying.

JEL classification:  C52, E52, G21.

⁷Acknowledgments: This study was supported by the outstanding youth project of Education Bureau of Hunan Province, China (20B326), the construct program of the applied characteristic discipline: applied economics in Hunan Province, China (2018469) and postgraduate scientific research innovation project of Zhongnan University of Economics and Law (201810507).