An Analysis On The Effectiveness Of Credit As A Financial Imbalance Leading Indicator

In recent twenty years, the financial imbalance in the economy has become normal inmany countries. Financial balance has become a policy goal in many countries. How toeffectively predict the financial imbalances and defense it has became one hot point ofmany scholars’ study. This article is trying to find identify the effective leading indicator onthe basis of financial imbalances indicator. So it can discover the signs of financialimbalances and take effective preventions with the observation and control of the leadingindicator. The study of leading indicators of financial imbalances mainly starts with twoaspects. First, build financial imbalances index by analyzing the factors of financialimbalances. Namely, build the financial imbalances index by asset price volatility, leverageratios, banks’ bad loan ratio and so on. The second is to study the effectiveness of leadingindicator. This paper selects the indicator of credit as a leading indicator to examinewhether the credit is an effective leading indicator because it is closely linked to asset pricevolatility and leverage ratios.In this article, through studying the mechanisms of how the credit effect the real estateprice, the stock volatility, leverage and non-performing loans, we can find that credit hasobvious leading affection to financial imbalance. Through the model of VAR andState-Space, the empirical results show that the credit has great effect on financialimbalance. Meanwhile, we cannot ignore the lag effect of credit. And the change rate ofM2also has big effect on the financial imbalance. Although the change rate of foreignexchange reserve and financial institutions LDR also have certain influence, but the effectis not big. At last, the article will give some suggestions about the credit, the policy ofmoney, the foreign exchange reserve and the financial institutions LDR to promote thefinancial balance.