Abstract: There is a risk of slowing down the growth rate of the Chinese economy in the process of structural optimization, mode transformation, and quality and efficiency improvement. It is worth paying attention to whether the dual pillar policy will have a significant negative impact on economic growth in regulating financial cycle fluctuations. On the basis of constructing a financial condition index, this article identifies the state of the financial cycle and analyzes the impact of dual pillar policy regulation on output when the financial cycle is in different states using the Markov Region Transfer Vector Autoregressive (MS-VAR) model. The empirical results show that there are differences in the impact of dual pillar policy regulation on output when the financial cycle is in different states. When quantitative monetary policy is combined with macro prudential policy using liquidity ratio regulation and core tier one Capital adequacy ratio as tools, loose monetary policy can significantly promote output growth in the financial boom period, but when combined with macro prudential policy using excess deposit reserve ratio as tool, loose monetary policy can significantly promote output growth in the financial crunch period. Therefore, before formulating and implementing the dual pillar regulation policy, it is necessary to comprehensively evaluate the policy effect, fully consider the financial cycle state and the business cycle state, and select the appropriate policy mix.

Keywords: financial cycle; Dual pillar policy regulation; Monetary policy; Macro prudence; Output response;