Construction And Application Research Of Financial Conditions Index Based On Monetary Policy Transmission

Decision on monetary policy has far-reaching significance for economic operation, the changes can influence both nominal variables and in short-term affect real variables, namely in short-term it is not neutral. To inspect information function of financial market prices and measure the monetary policy conditions comprehensively, some economists construct general price index including financial market prices, they point out that if the financial market prices such as interest rate and exchange rate reflect the current value of present and future consumption, the central bank should take its price inflation into policy consideration. Some scholars advocate making up an asset price index using different financial market prices that impact on economic development, which are respectively Monetary Conditions Index and Financial condition Index according to range of assets.At present, though in most countries vicious inflation seems to have disappeared, the macro economic fluctuation has no reduction thus, In nearly two decades, most of economic fluctuations often arise from the financial field, especially that asset prices rise and then collapse rapidly is seemed as the key factor of macro economic fluctuation. At the same time, along with the soaring price of estate, bubble trend deeply threatens the stable operation of economy, accumulation and rupture of estate price bubbles will eventually become macroeconomic factors of instability, or even cause financial and economic crisis, due to the policy adjustment and the law of value. So based on financial market price, quantity in monetary policy comprehensively, it is necessary to take the variables of non-monetary assets into MCI in order to adequately inspect effect of monetary policy on output and inflation, and to accurately illustrate financial economic situation of country. For the countries in which non-monetary asset market has a flying faster development, its effect on monetary policy implementation should be even more taken into account.Therefore, on the basis of MCI Goodhart & Hofmann (2000) propose FCI which arises from MCI, estate market and stock market prices that also have effect of monetary policy are added in MCI. They point out the FCI can show conditions of stock and estate market and their influence on economy which aren't reflected in MCI, future inflation pressure could be explained systematically and comprehensively by FCI. This article has combined monetary policy practice in China and researched empirical problems associated with the FCI, such as monetary policy transmission channel, FCI construction, test and evaluation of FCI, use of rules or discretion in monetary policy implementation, the chief content of chapters follows:Chapter 1 introduces writing background, significance and research methods in theory, summarizes previous research status both at home and abroad, points out main construction of this article, innovations and shortcomings.Chapter 2 sketches out theory related to monetary policy and policy transmission mechanism. Using graphics and mathematical models, action of different transmission mechanisms is made clear, according to the actual situation in our country classifies the factors that influence on policy transmission into qualitative and quantitative ones. In accordance with different indicators'effect on main target variables, this chapter discusses proxy variable selection of quantitative factors, which is picked as basal indicators for constructing FCI in following text.Chapter 3 inspects systemic change between economic aggregate and inflation and quantitative factors mentioned previously.In the basis of modern macroeconomic impact theory, using systemic VAR model, this chapter does a test of monetary policy transmission mechanism through financial market price, financial markets quantity and non-monetary asset price, although different periods, the results suggest interest rate, exchange rate, money supply, credit scale, estate and stock prices all affect final target changes of monetary policy significantly, which certifies existence of these policy transmission channels.Based on the understanding of mutual influence on transition variables, as a single equation, nonlinear STR model examines the asymmetrical effects of monetary policy transmission on output. Statistics suggest that in nonlinear STR model monetary growth rate, estate price growth and its two order lag, one and four order lags of stock price growth exist properly as transmission variables, which have a control of transition between different conditions, the dependent variable also shows asymmetrical features obviously for indicators above.In nonlinear model market interest rate is not suitable as transition variable, which is in contradiction with that asymmetrical influence is universal in developed countries, maybe relatively low degree of marketization interfere with price inner balance mechanism of finance. Promoting effect of increase in number of currency on output wears off along with gradually intensive nonlinear part of model, and the influence of nonlinear partial interest rate tends to be disappeared. Either in linear or nonlinear part, real estate price can propel real economic growth more superiorly than stock price, and smooth parameter suggests that nonlinear effect estate market on real output is stronger, in sample period the model is often shown as a synergistical form of double linear models. BDS inspection indicates that, compared with long-term value, recent value of estate price and stock price growth can better satisfy with the i.i.d. of residual as transition variables, estate and stock market volatility is so severe because of faultiness, which makes its short-term fluctuation can overall change the development trend of macro economy.Chapter 4 introduces the development process of the previous FCI, points out form of mathematical model can be derived in AD-AS framework, summarizes characteristics of calculation method, for further measuring monetary policy implementation and the whole financial situation, constructs FCI in China using aggregate demand model reduction, VAR model, SVAR model, the principal component regression model and the simultaneous equation model which include non-monetary assets price factor and monetary scale. And simultaneous equation model is initially used interiorly.Through the graphic, dynamic correlation coefficient, granger non-causality test, impulse response function analysis, this chapter investigates synthetically advantage and disadvantage of all methods and applicability in China, does a test and evaluation of index, result indicates that FCI can better fit link relative inflation, correlation and causality are both stronger. Rising of FCI suggests financial and monetary policy incline to be slack, on the contrary financial condition is tight, time route of index has significant relationship with actual financial environment volatility, FCI made by different methods, when weight of interest rate and exchange rate is bigger, responds to inflation very timely, so sensitive to fluctuation in financial condition. When weight of estate and stock prices is bigger, FCI can hardly reflect the non-trend changes which arise from little adjustment in monetary policy, but can better explain trend changes of actual financial condition. Estate market definitely has strong feedback effect on monetary policies.Finally, in-sample and out-of-sample forecast are made using different FCI, VAR unconditional prediction can improve accuracy of in-sample prediction, introducing "adaptive expectations" hypothesis, under ideal situation that adjusting speed is one, combination of random walk model and VAR can improve out-of-sample forecast accuracy through FCI made by simultaneous equations. Empirical conclusion suggests inflation in China form with adaptive characters, innovation such as change of financial condition only act on non-trend part of inflation, residents and enterprises incline to information in the past as main basis.Chapter 5 further discusses how monetary policy implementation is made, through mention monetary policy rule and discretion. In the short term, dynamic analysis indicates that whole macro economy is easier to achieve stable state in the rule which seems currency amount as goal than in the rule has a interest rate objective. And as long as response of central bank to economy is endogenous in rules, there is no contradiction between rule and discretion, acting under rules is just relatively steady discretion as a monetary policy guidance, departure from policy rules can be allowed in emergency period.When investigating applicability of McCallum rule and Taylor rule, GMM estimation including FCI as instrumental variables demonstrates that McCallum rule doesn't coincide monetary policy practice in China, behavior of monetary base is pro-cyclical for inflation, which exacerbates the macroeconomic fluctuation. While result of Taylor rule confesses the rule is identical with interest rate policy very well, with strong smooth feature in central reaction function, response of nominal interest rate to output gap is slow, response to inflation is still inadequate, real interest rate is pro-cyclical, which is not good for price stability. According to conclusion of dynamic analysis, close cooperation of fiscal policy is so crucial for alleviating instability arising from interest control.Chapter 6 summarizes main conclusion in the article, and gives several policy suggestions about keeping policy transmission channel open, improving instruction function of FCI for monetary policy, choosing ways by which policy is implemented and coordinated development in financial market.