Monetary policy regulation and effectiveness of bank liquidity risk in China: a non-linear study using Markov-switching VAR models

We investigate the nonlinear effect of quantitative and price-based monetary policies on bank liquidity risk from January 2005 to December 2022. We find the optimal mode of monetary policy to regulate bank liquidity risk in different regimes and the evidence that affects the effectiveness of monetary policy regulation. Specifically, high bank liquidity risk is more appropriately regulated by price-based monetary policy, although there is no significant difference between quantitative and price-based for medium and low bank liquidity risk. However, the higher degree of financial openness and cycle superposition reduce the effectiveness of monetary policy in regulating bank liquidity risk. Considering that monetary policy can regulate bank liquidity risk by affecting China's financial cycle, adopting monetary policy to regulate China's financial cycle not only reduces the degree of cycle superposition and thus improves the effectiveness of monetary policy, but also achieves the indirect management of bank liquidity risk.