Construction and application of China Financial Conditions Index
|School||Nanjing Normal University|
|Keywords||Financial condition index Assets price Inflation Economic growth|
Since the1990s, although the major capitalist countries controlled their inflation well, assets price has experienced severe fluctuation. The sharp fluctuation of assets price lead to the global financial imbalances and financial instability, and scholars pay great attention to it. Based on the important effect of assets price in monetary policy transmission mechanism, Goodhart and Hofmann (2001) constructed the Financial Condition Index (FCI) first by putting housing and stock prices into Monetary Conditions Index (MCI), and FCI can reflect the change of future inflation. In recent years, China’s real estate price is rising, stock price fluctuat severely, and inflation remains high, the establishment of China’s own Financial Condition Index is very important for China’s monetary policy operation.Based on the construction of the Financial Conditions Index, FCI variables include interest rates, foreign exchange rates, real estate prices, stock prices and the amount of credit. We use the VAR generalized impulse response method to estimate the effect of each variable to inflation and measure the weight of each variable, and then calculate our Financial Condition Index. Then, We analyze the relation between FCI index and inflation、economic growth, then we can provide suggestions for our country’s monetary policy. This paper combines theoretical deduction and the empirical analysis together. First of all,It elaborates the Financial Condition Index theoretical basis systemly in monetary policy transmission mechanism perspective, and it introduces the interest rates, foreign exchange rates, asset prices and credit transmission mechanism in the monetary policy transmission mechanism. It can provide a strong theoretical basis for the construction of the index and empirical analysis through the theoretical analysis. Secondly, this paper introduces the variable selection and processing and data sources, and it tests each variable data stationarity by ADF test, then We can estimate the effect of each variable to inflation through the VAR generalized impulse response method and determine the weight of each variable, and calculate the figure of our Financial Condition Index. Finally, We use the linear graphics, cross time relevance, granger causality test, circulation prediction model and other methods to evaluate China’s Financial Condition Index.we found Through empirical analysis that:firstly, interest rate, real estate prices and the credit amount have a great effect on inflation,and their weight in the FCI index are27%.34%,27%. it shows that, as China’s dominant monetary policy transmission channels credit factors still have a great impact on the economy; And owing to China’s financial reform in recent years, the impact of interest rates factors on the economy appear gradually, but it is much lower in contrast with foreign advanced countries; Asset prices (especially real estate prices) have a greater influence on the economy. Second, our country’s Financial Condition Index can predict future inflation rate before5and6mouth and it can predict inflation very good, so it can be used as an indicator of China’s monetary policy. However, it can predict the future of GDP growth only1,2mouths in advance and the forecast ability is limited, our state’s asset prices transmission mechanism is still not smooth, so the central bank should pay proper attention to assets price changes, but can’t put it into the monetary policy operation index.