An Empirical Study On The Impact Of Financial Conditions Index To Inflation

From the beginning of the 1930s, inflation has become the core economic issues of common concern worldwide.30 years of reform and opening up, China has experienced four serious inflations. Throughout each occurrence of inflation, the inflation phenomena are found with the typical characteristics of the times, especially in the 21st century, the deepening of the financial system, the continuous development of the financial markets, monetary and financial factors that influence inflation is increasingly becoming the primary level factor. But in real life different financial factors on inflation have different degrees of impact, the direction of the influence even completely opposite.This article will measure a comprehensive index, FCI which a number of financial variables included. And investigate the effect of its impact on inflation. In January 2000 to December 2012 for the sample interval, Using VAR generalized impulse response function method to measure the FCI in China, which includes loans, interest rates, exchange rates, real estate prices and stock prices. First, study the FCI and inflation’s correlation analysis. Then FCI is introduced to Phillips Curve model, use GMM method to estimate the model, Compare the difference of the impact of the FCI and other factors on inflation. Then take into account the background of the financial crisis, FCI were studied of the impact on inflation at different times before and after the financial crisis. Finally, taking into account the regional development imbalances, the degree of economic openness, the level of financial development, we use inter-provincial panel data to do further robustness test to study the relationship between the FCI and inflation. The empirical results show that,Firstly, FCI lagging six months shows the strongest correlation with inflation, FCI can accurately reflect the monetary and financial situation, FCI contains useful information on future inflation.Secondly, FCI has a significant impact on the current inflation rate. Compared to the output gap, FCI has greater influence. But compared with inflation inertia, FCI has weaker impact. Then analyze the FCI lag effect, Found that FCI lagging six months has the most obvious impact on inflation, FCI lagging lyear has reversed the effect on the current inflation.Thirdly, under the extended Phillips curve model, we found that the impact of the output gap and FCI lagging six months on inflation after financial crisis more pronounced than that before the crisis.Finally, in hierarchical robustness test, we found that FCI has regional effects of inflation, FCI has little impact on inflation of eastern region, region of high degree of economic openness, region of high financial development level. So the level of economic development, economic openness, the level of financial development are also influencing factors of inflation.