A Construction Of Chinese Financial Conditions Index: Based On DSGE Model

At present, there is a lack of evaluation index including asset price which can perfectlyreflect the financial environment in our country. Therefore, after reviewing the financialconditions index’s theory, construction and application, this paper using theoretical andempirical analysis to select nominal interest rate, real effective exchange rate and Housingprice as the indexes to construct Chinese financial conditions index according to situationof China. Then the paper determines the weight of indexes using an open economy DSGEmodel with housing sector innovatively and finishes the construction of Chinese financialconditions index. Finally, the paper analyzes the relations among the Chinese financialcondition index, inflation and economic growth, and puts forward the application andpolicy suggestion accordingly.The main viewpoint of this paper as follows: First, though nominal interest rate, realeffective exchange rate and real estates price has influence on economy both theoreticallyand empirically, Housing price is not included in Chinese financial condition index of thispaper because its share of household’s assets is too small. Second, in the structure ofChinese financial condition index, interest rate, real effective exchange rate and real estatesprice account53.28%、16.25%and30.47%separately, which means that interest ratetransmission mechanism is the most significant in comparison with other two ways andhosing price also has great influence on economy. Third, this paper shows that the changerate of inflation rate has leading effect on Chinese financial condition index, Chinesefinancial condition index has leading effect on the change rate of economic growth rate andthe change rate of economic growth interacts with the change rate of inflation rate. It meansthat Chinese financial condition can be used as the indicator of monetary policy to bridgeinflation and economic growth.