| Since 2003, China's economy has entered a new round of rapid growth period at the growth rate of more than 10% for 6 years. It is the longest expansion period in the last three decades. Followed with the rapid development of economic, the inflation pressure has been increasing and performed some new features. This paper analyzes the changes in mechanism of inflation in recent years, there are three significant features:Firstly, structural inflation is the main form of inflation, the asset prices and primary commodity prices have an increasing effect on the overall price changes. Secondly, the competitive products have so great supply elasticity that the universal and sustained rise for general consumer prices has a small possibility. The primary commodity prices inflation caused by financial speculation is the main reason for rising in CPI and PPI. Thirdly, when CPI rises significantly, it has already stated at the eve of the financial bubble burst. Therefore, for measuring the periodic variation. CPI, especially the core CPI, will be lagging. The asset prices play an important role on inflation and the current CPI system is not well characterized the inflation changes. Therefore, we need to explore the more rational and comprehensive indicator for measuring prices. Based on the importance of asset prices in monetary policy transmission, Goodhart and Hofmann (2001) joined the real estate prices and stock prices in the Monetary Conditions Index (MCI) and constructed the Financial Conditions Index for reflecting the future changes in inflation.In this paper, we take the Financial Conditions Index as a starting point. Firstly, we use VAR (Vector Autoregressive) method to construct China's FCI and use the impulse response method based on CPI inflation rate to estimate the weight of each explanatory variable coefficient, and then analyze their impact on the extent of the Financial Conditions Index. Furthermore, we use them to reveal the impact of FCI for future inflation and output. Secondly, on the basis of empirical analysis, we analyze the relationship between FCI and inflation to determine its prediction ability for future inflation pressures. In addition, we give a brief analysis on the relationship between FCI and economic growth in order to provide some advices for the operation of monetary policy.In this paper, we attempt to break the method of constructing the traditional and standard form of FCI. Considering the bank credit is an important monetary policy transmission channel, we take the real credit of RMB as a major variable of FCI which also includes interest rates, exchange rates and asset prices (real estate prices and stock price) to analyze their effects on the changes of economy. At the same time, we estimate the standard form of FCI and give a comparative analysis for two indexes. The results show that:the standard form of FC102 has more significant explanatory power than the extended form of FCI01 for the future inflation. FC102 has good predictive ability for future inflation changes and forecasts the inflation for advanced 2-4 quarters. We comparatively analyze the relationship between FC102 and CPI and the relationship between FCI02 and economic growth, and then we find that FCI02 has greater impact on the inflation than on the GDP growth rate, the correlation between FCI02 and GDP growth rate is weak.Therefore, the conclusion is that the standard form of FC102 constructed by the interest rates, exchange rates, real estate prices and stock prices can reflect the overall financial condition changes in China. When we implement monetary policy, the central bank should concern about the effect of asset price changes on inflation. However, as asset prices are not well responded in monetary policy transmission, currently, the asset prices can not be used as indicator in the actual operation of monetary policy. Thus, the Financial Conditions Index can be seen as a good indicator in the operation of monetary policy. It has great significance for the management of inflation expectation and inflation governance. |
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