On The Formulation And Application Of China's Financial Conditions Index

In recent years,the financial conditions index has regained the attention of scholars and policy makers due to its inclusion of asset price factors.Under this background,firstly,we define the conception of static financial conditions index,dynamic financial conditions index and the effectiveness of financial conditions index.Then,we set forth the theoretical foundation of financial conditions index and give an overall literature review.We build China's dynamic financial conditions index via variable screening and we evaluate the effectiveness of China's dynamic financial conditions index.Finally,we analyze the domestic and the transnational effects of dynamic financial conditions index.There are three aspects of the conclusions of this thesis:Firstly,the effectiveness of financial conditions index.Static financial conditions indexes have low intertemporal correlation with CPI,while dynamic financial conditions index has high intertemporal correlation with CPI.The forecasting accuracy of dynamic financial conditions index is higher than static financial conditions index.Therefore,dynamic financial conditions index has higher effectiveness.We conduct four robust tests of this conclusion:changing the forecasting models,changing the model parameters,including more data and changing the model prior.Meanwhile,we find that dynamic financial conditions index is sensitive to important economic or financial events.Secondly,the domestic effects of dynamic financial conditions index.We find a clear regime switch of dynamic financial conditions index,the threshold is significantly not equal to 0.The switching variable is_-4,which means the dynamic financial conditions index indicates the regime switch four months in advance.The financial conditions of China is divided into two period.The first period is 1996 to 2008,in this period,the fluctuation of Chinese financial market is low.The second period is 2008 to2020,in this period,the fluctuation of Chinese financial market is high.Thirdly,the transnational effects of dynamic financial conditions index.The financial cycles are divergent between China and America in the whole sample.The positive financial shock of Eurozone has negative effect to China's financial conditions index.The positive financial shock of China has positive effect to Eurozone before 2009and negative effect after 2009.Before 2000,the positive financial shock of Japan has no effect to China's financial conditions index,however,it has negative effect to China's financial conditions index after 2000.The positive financial shock of China has negative effect to Japan's financial conditions index before 2012 and positive effect after 2012.Based on our conclusions,China should build an appropriate financial conditions index which makes use of both the time-varying weights and variable screening.We should carefully evaluate the consequence of macro policies as well as the risks of financial markets.The policy-makers should pay attention to the asymmetry effect of financial shocks to ensure reasonable conduction of policies.Due to the divergency of financial cycle between China and America,Eurozone,Japan,the policy-makers should carefully distinguish the type of outer financial shocks.