The Research On Variable Selection Of Financial Conditions Index And Its Application

The effectiveness of monetary policy is one of the most attention problems,Financial Conditions Index made by Goodhart and Hofmann do well in measuring acountry’s overall financial situation, predicting the future trend of output growth andinflation, which has been used as a monetary policy decision-making reference formultinational monetary authorities and indicators. However, our research in this areais relatively late and less, at present only Goldman Sachs regularly publish China ’sFinancial Conditions Index.Facing this situation, this paper based on principles of scientific, systematic,comprehensive and practical, with the monetary policy transmission channels astheoretical basis, with the variable selection of Financial Conditions Index asbreakthrough point. Firstly, we determined the variable selection pool of narrow,amplitude and wide Financial Conditions Index. Then we selected the variablethrough reliability test and validity test which is based on structural equation model.Following, we established three different f Financial Conditions Index by using VARimpulse response function method from January2006to December2013monthly.Finally, we verified the function of Financial Conditions Index as an indicator formonetary policy effect using linear trend, intertemporal correlation coefficient,granger causality test and impulse response analysis. The empirical results showedthat all of the three Financial Conditions Index had good prediction effect of futureinflation rate in short term(1-3months).So they can be used as a indicator of ourcountry’s monetary policy implementation.To a certain extent, this paper has filled the domestic gap in the research ofFinancial Conditions Index. It also has a certain value for the construction andapplication of Financial Conditions Index in China. Finally, combined with theempirical results and the present situation, we proposed relevant policyrecommendations of three aspects.