The Construction And Application Of Fictitious Economic Condition Index In China

The fictitious economy referred in this paper is a kind of economic activity, which is the opposite of the real economy and performing relying on financial platform and a variety of relationships integrated from this economic activity. Nowadays, with the rapid development of the fictitious economy, it has become a major global economy form. Because of the linkage between the fictitious economy and real economy, the health of the fictitious economy will directly affect the overall macroeconomic development. Although fictitious economy has been rapid developed in our country, most Chinese scholars only study the relevant linkage between the fictitious economy and real economy, but not a direct indicator that can reflect the development of fictitious economic. Therefore, an economic index which can intuitively reflect the trend of fictitious economic development appears to be particularly important.Firstly, we reviewed and described the progress of the currency situation f of Financial Condition Index and Monetary Condition Index the domestic and foreign scholars have studied. We draw on the constructed method of both index and attempt to use two methods to construct a Fictitious Economic Conditions Index (FECI). We hope to achieve the goal to measure the condition of fictitious economy in our country. Also, we plan to predict the future macroeconomic situation in China from the perspective of inflation and economic growth. In this paper, during the process of building FECI and according to the effect on fictitious economy, we selected some indicators. Then, we use certain statistical methods to make a certain amount of pre-treatment, such as HP filter, excluding seasonal trends. By generalized impulse response method based VAR model and a simplified aggregate demand equation with variable coefficients based on state space model, we constructed a FECI, containing interest rates, exchange rates, real estate prices, stock prices, bond prices, the balance of loans from financial institutions and other price or non-price variables.After completion of FECI, we make a comparative analysis between China’s fictitious economic situation and FECI, in order to test the correlation between the two cases. With the help of statistical methods, such as linear correlation diagram、 the cross-correlation analysis, Granger causality test, samples outside the test methods, we determine if FECI has the role to forecast macroeconomic, so that it can provide a reference for the implementation of monetary policy.This article includes the following sections:First, we make a brief description about the research background and motivation and sort out the relevant research literature to find a theoretical basis for this study. At the same time, we briefly summarize the lack of previous research achievements, and illustrate the research method. Second, we explained the meaning of the fictitious economy and the theoretical basis of FECI we constructed. Thirdly, with the selection and processing of the sample data, two methods were used to construct a Fictitious Economy Conditions Index, it made economic sense explanation. Fourth, based on previous theory, combined with the specific data econometric model, we make an empirical test about the relationship between inflation and growth. Finally, this paper summarizes the insufficient structure FECI index exists and suggestions for improvement.Feature of this paper is mainly reflected in the following aspects:when constructing FECI, we selected the monthly data, increasing the sample size. To some extent, it can improve the credibility. Second, the paper rescreened and expanded indicators of FECI index, so that indicators of FECI have both economic and theoretical significance; Third, based on past ways to construct FCI, we use both VAR model and state space model to construct FECI. By comparing each method with the state of development of the fictitious economy and the advance of the inflation and economic growth, we can tell the effect of each index.The results showed that:FECI based on VAR and state vector space model has a high fitting degree of fictitious economic conditions, and VAR Model has a better fitting effect. At the same time, due to the different methods, the contribution of each variable to the fictitious indices is different, the weight of each variable are more dependent on model we constructed. The FECI we constructed by two methods can have a good forecast role to future inflation, but the forecast role to the growth forecast is very limited.