Research On The Relationship Between Financial Condition Index And Macroeconomic In China

In 2008,the United States erupted into a financial catastrophe called subprime crisis.The damage caused by financial disasters not only impacted the financial system,but also spread to all fields and sectors,damaging the world economy deeply.This financial disaster has been widely spread and lasting for a long time,which has brought inspiration and warning to the financial regulation and control of monetary policy:we should pay attention to the impact of financial market conditions on economical movement.Only by mastering more information about economic operation,having stronger judgment on future economic trend and communicating with the market more effectively,we can improve the efficiency of macro-control.In recent years,China has attached great importance to market expectations and proposed to "improve communication with the market and enhance predictability and transparency".Therefore,it is necessary to make use of information about financial conditions to better understand and improve macroeconomic forecast.In order to solve this problem,basing on the VAR model,we build China's Financial conditions Index(FCI,Financial Condition Index),which include the gap values of broad money supply,stock prices,the exchange rate,the short-term interest rates and the balance of loans.We make use of this to grasp the association with financial conditions Index and macroeconomics,which will help us understand the role of financial market factors in macroeconomic fluctuation.This paper based on the statistical standards of data preprocessing,appropriate rely on VAR method,according to the dependent variable of GDP growth of impulse response function,calculation of the need to build the FCI all financial component contribution rate,and the gap value of the HP filter method for each quarter,the gap of each variable values calculated and generation into their respective value contribution,summary to calculate the FCI.Then,based on the quarterly data,the correlation between the FCI and the macro-economy such as CPI and GDP growth rate was searched to confirm the forecast of the FCI on the macroeconomic activities.Thirdly,considering the impact of financial fluctuations on economic fluctuations,this paper also conducts an empirical analysis of the correlation between FCI's fluctuations and economic fluctuations.Based on the empirical analysis,our paper puts forward to the following conclusions:first,the weights of three indicators,including actual effective interest rate,credit balance and broad money supply M2,are respectively 0.26934,0.26609 and 0.20486.In obvious,they occupy the highest proportion.This shows that interest rate,actual credit balance and money supply have a decisive influence on macroeconomic aggregate through monetary policy transmission channels.Secondly,the weight of stock price index in China's financial condition index is 0.03879,ranking fourth,which reflects that the stock market,as an important investment and financing channel,plays an important role in monetary policy transmission.Third,the index of financial conditions can predict the CPI of three periods in advance and explain the fluctuations of the CPI of 52.0186%.The financial conditions index has the best predictive effect on the fluctuation of GDP growth rate in a period,explaining the change of GDP growth rate of 26.1787%.It can be seen that the financial condition index constructed has certain predictive effect on CPI and GDP in the macro economy,and the central bank can refer to the financial condition index when formulating and implementing monetary policies.Fourthly,the standard deviation of financial condition index based on sample estimation contributed about 25.2895%to CPI interpretation.The explained contribution rate to GDP growth is about 10.0183%,which indicates that the volatility of financial condition index will affect the macro economy as a whole.The Innovations of this paper are listed as follows:we not only focus on the connections between financial conditions index's level with CPI and GDP,but also examine the link between financial conditions index with two important macroeconomic indicators in terms of monetary policy transmission mechanism.What's more,from the view of volatility,we estimate financial conditions index fluctuation and its predictive power for GDP and CPI growth in general.But there are deficiencies in this paper.First,the paper constructs the financial condition index weight in the static state.In fact,under different economic situations,different factors in the index system have various impacts on the financial conditions index.It is necessary to build a dynamic financial condition index,which can better reflect the current economic situation and financial development.Second,the factors that can influence the macro-economy can be abundant,and this paper does not take all factors into consideration.Due to my ability level,these questions are reserved for further research.