Research On The Measurement,mechanism And Policy Effect Of China’s Financial Cycle

Since the 2008 financial crisis,the rate of economic growth in China has declined continuously and the fluctuation of economic cycle has increased.Meanwhile,the financial system has been abnormally prosperous,which indicated the credit in non-financial private sector and the price of real estate has burgeoned.How to explain the interrelationship of economic system and finance system has being concerned by academic world recently.The Real Business Cycle Theory(RBC)tells us that the finance is neutral,and fluctuations of the business cycle are only influenced by real economic variables such as capital,labor,technology,etc.However,such kind of opinion was proved to be wrong because of the global financial crisis in 2008.Besides,the academics began to pay attention to the impact of financial factors on the fluctuations of business cycle and proposed the Financial Cycle Theory.So problems such as how to measure the financial cycle,what is the mechanism of the financial cycle,what kind of effect it plays on the fluctuation of economic cycle,and how to stabilize the financial cycle through macroeconomic policies are the core issues of the Financial Cycle Theory.Based on above challenges,our research is focusing on the above-mentioned problems.Firstly,this paper applies the method of Singular Spectrum Analysis to measure the financial cycle and economic cycle of China.The results show that there are two kinds of length about the financial cycle and economic cycle of China,that is short cycle and medium cycle.From the perspective of short cycle,the length of the economic cycle is greater than that of the financial cycle,but the volatility of the financial cycle is greater than that of the economic cycle.Judging from mid-cycle,the length and volatility of the financial cycle are in line with the economic cycle.Secondly,this paper applies the Dynamic Stochastic General Equilibrium Model(DSGE)to simulate the mechanism of financial cycle affecting the fluctuations of business cycle in China.We mainly put two kinds of model mechanisms into consideration,which includes the mortgage constraint of the enterprise and the capital constraint of the commercial bank.By the method of Bayesian estimation,the results show that financial cycle amplifies the fluctuations of economic cycle through the above mechanisms.On the empirical level,this paper aims to link the Financial Cycle Theory with the Financial Accelerator Theory,adopts the variables and methods of the financial cycle,and applies the method of Markov Switch Vector Auto Regressive Model to study the regime characteristics of the effect of Financial Accelerator in China.Its research results show that during the periods of economic severe fluctuations,the effect of the Financial Accelerator is much stronger than the periods of stationary period,which means when the economy fluctuates sharply,financial cycle amplifies the fluctuation of economic cycle much stronger.This indicates that the central bank should identify the difference of the effects of Financial Accelerator during different periods and design differentiated monetary policies as well as macro-prudential policies to mitigate the adverse effect of the Financial Accelerator on the economy.Thirdly,this paper also studies the impact of monetary policy on the financial cycle.On the one hand,this research incorporates the expectation management policy into the DSGE model based on the ideas of news shock,compares their similarities and differences,and analyzes the effects of the expectation management policy and the traditional monetary policy on the financial cycle.The result of our studies shows that the expectation management policy is better than the traditional moneytary policy in stabilizing the financial cycle,and the expectation management policy reduces the welfare loss of the entire society,which indicates that the central bank should guide the public through communication to reduce the real estate price and credit markets in order to decrease the magnification of the financial cycle on the economic cycle and prevent systemic financial risk.On the other hand,this paper constructs a model of Structural Vector Autoregressive Model(SVAR)that includes variables of quantitative monetary policy,price-based monetary policy,financial cycle and economic cycle,compares the effects of quantitative monetary policy and price-based monetary policy on the financial cycle.The results show that the quantitative tools of monetary policy are more effective than price-based tools in stabilizing the financial cycle.The reason is that the transmission channel from the short-term interest rate to the credit market is not smoothly.The central bank needs to further promote the marketization of interest rate and clear the transmission channels from short-term interest rates to the credit market.Finally,this paper studies the impact of macro-prudential policy on the financial cycle.Our research selects the provision coverage ratio,liquidity ratio,and excess reserve as the representative variables of macro-prudential policies,and uses the rolling regression VAR model to analyze the time-varying characteristics and relative effectiveness of three tools of macro-prudential policy that affect the financial cycle.The results show that with the passage of time,the effect of macro-prudential policies in stabilizing the financial cycle has become more and more effective,and the three tools of macro-prudential policy have different influences on financial cycle variables.Provision coverage ratio and liquidity ratio have a good stabilizing effect on real estate price,but have little effect on the stabilization of credit and macro leverage.Excess reserve has a greater effect on credit,real estate price,and macro leverage during the financial crisis.