Abstract: Based on multidimensional financial index system，this paper employed factor augmented vector autoregressive models with time-varying parameters to calculate the dynamic financial conditions index in China，which is used to measure the fluctuation of financial conditions and included in the target system of monetary policy． On the basis of constructing the New Keynesian model with endogenous financial shock to analyze the optimal response mechanism of monetary policy to economic and financial fluctuations，we empirically tested the adaptability of the optimal monetary policy rules containing the target of financial stability in China．The results show that，the optimal monetary policy rules that take into account the dual stability of finance and economy can effectively reduce the bias that may occur when traditional monetary policy reacts to price and output fluctuations; compared to the period before the financial crisis，the effectiveness of China’s monetary policy in regulating price fluctuations has been enhanced，the response to economic fluctuations has remained stable，and the response to changes in the financial situation has increased significantly during the post-crisis era． These studies provide a useful empirical basis and policy implications for the further improvement of monetary policies’scientificity and effectiveness and the realization of both macroeconomic and financial stability．

Keywords: Financial situation index; monetary policy rules; financial stability; inflation; TVP-FAVAR model