Construction And Application Of China's New Multi-Regimes Threshold Financial Conditions Index Based On Mixed-frequency Loss Function

China has become the largest developing country in the world.In the new era of global financial integration,China's economic development is facing new opportunities and challenges.This means that China needs a series of more perfect monetary policies to help China's economy continue to move forward better,so it also has higher standards and requirements for China's policy makers.With the diversification of economic market,the transformation of industrial structure and the increase of financial information,the traditional single variable two mechanism model and general linear model have become increasingly unable to meet the urgent needs of the authorities to fully understand the current economic situation.Therefore,it is the common goal of financial scholars to build a model that can cover more information and better describe the structural changes of China's current financial situation,so as to formulate a more objective and effective financial situation index that can reflect the current financial situation.In this paper,the Structural Factor-Augmented VAR(SFAVAR)and the new Multiple Regimes Threshold Vector Autoregressive model(NMR-TVAR)are first developed to construct the Multi-Regimes Structural Factor-Augmented Threshold VAR(MR-SFA-TVAR).Then we uses the Mixed-Frequency Dynamic Factors Model(MF-DFM)to build China's Mixed-frequency Loss Function(MLF)whose main ingredients are GDP and CPI and extract six structural common factors of 24 financial indicators from January 1998 to September 2018.Those factors are money supply,interest rate,exchange rate and stock price,house price,bank credit.Basing on the China's MLF and six structural common factors,we use the Multi-Regimes Structural Factor-Augmented Threshold VAR(MR-SFA-TVAR)to measure empirically China's New Multi-Regimes Threshold Financial Condition Index(NMR-TFCI).After that,this paper compares this index with the 2-Regimes Threshold FCI(N2R-TFCI)and the linear 1-Regime FCI(NIR-FCI).Finally,this paper discusses some applications of the NMR-TFCI.The empirical analysis shows that:(1)he China's MLF,whose main ingredients are GDP and CPI,is a reliable indicator of dual ultimate goals of monetary policy;(2)China's new multi mechanism threshold financial condition index constructed based on MR-SFA-TVAR,has the characteristics of multi mechanism and non-linear.It can cover more financial information and reflect the current financial situation more effectively and objectively;(3)Comparing with N2R-TFCI and N1R-FCI,China's NMR-TFCI is a better leading,relevant indicator for output and inflation.It can also explain the causality of output and inflation clearly and predict them accurately.And it can well describe the uncertainty of China's monetary policies;(4)Threshold characteristics are reflected by both monetary policy transmission channels and effects of regulating and controlling the output and inflation;(5)China's monetary policy combines price and quantity to regulate and control national output and inflation and asset price notably contributes to it;(6)NMR-TFCI is a good tool to analyze the uncertainty of China's monetary policy and an effective index to predict China's systemic financial risk.