The Theory Of Financial Condition Index Based On TVP-FAVAR And Its Application In China

With the continuous advancement of many scholars,dynamic factor model has become an important branch of macro econometrics.The main idea of dynamic factor model is to extract potential common factors from high-dimensional data and identify the common features that affect the volatility of the interpreted variables.In the development of dynamic factor model,the latest research focus is the dynamic model method based on TVP-FAVAR model.As far as China is concerned,there are few literature studies on this model and its application in China.In this context,this paper studies the dynamic model method based on TVP-FAVAR.The research content of this paper is divided into two parts: the first part introduces the theory and estimation method of dynamic factor model,TVP-FAVAR and dynamic factor model based on TVP-FAVAR.Secondly,the dynamic factor model based on TVP-FAVAR is innovatively applied to construct China’s dynamic financial condition index(FCI)and analyze its influence mechanism with macroeconomic variables.The main conclusions of this paper are as follows:First,in the application of dynamic model method based on TVP-FAVAR,this paper extracts FCI from 18 dimensional financial data information set,and analyzes the relationship between FCI and main macroeconomic variables from the perspective of prediction ability,correlation and influence mechanism.The results show that: the FCI based on the TVP-FAVAR dynamic model method is more consistent with the dynamic characteristics of China’s macro-economy;Compared with the traditional TVP-FAVAR model,the FCI constructed in this paper has a lower prediction error and a higher correlation with the main macroeconomic variables.In addition,the FCI is three quarters ahead of GDP on average and one quarter ahead of inflation on average.It can well predict the short-term trend of the main macroeconomic variables,and can be used as a reference index for the formulation of monetary policy.Secondly,the idea of dynamic model is introduced in impulse response analysis to study the impact effect of China’s currency liquidity in 2000-2019.The results show that: during the sample period,the positive impact of China’s monetary policy on GDP,CPI,FCI and other impact mechanisms have undergone significant structural changes;Compared with the traditional TVP-FAVAR model,the dynamic model method based on TVP-FAVAR can capture the effective information more quickly when the economic trend changes structurally,so that the impulse response function can more accurately and more timely describe the time-varying characteristics of China’s monetary policy transmission mechanism.In short,based on the detailed interpretation of TVP-FAVAR model and dynamic model method,this paper confirms that the dynamic model method based on TVPFAVAR has a broad application prospect in empirical analysis.The financial situation index constructed based on this model can well depict the financial situation of China,reflecting the profound research and innovative application of the frontier methodology of macro econometrics in this paper.