Open AccessConstruction of China’s financial conditions index in the post-crisis era
Author(s) -
Nan Li,
Yuanchun Liu
Publication year - 2019
Publication title -
china political economy
Language(s) - English
Resource type - Journals
ISSN - 2516-1652
DOI - 10.1108/cpe-10-2019-0025
Subject(s) - china , inflation (cosmology) , financial crisis , economics , explanatory power , index (typography) , predictive power , value (mathematics) , originality , econometrics , autoregressive model , macroeconomics , finance , computer science , mathematics , statistics , political science , philosophy , physics , epistemology , theoretical physics , world wide web , creativity , law
Purpose The purpose of this paper is to summarize different methods of constructing the financial conditions index (FCI) and analyze current studies on constructing FCI for China. Due to shifts of China’s financial mechanisms in the post-crisis era, conventional ways of FCI construction have their limitations. Design/methodology/approach The paper suggests improvements in two aspects, i.e. using time-varying weights and introducing non-financial variables. In the empirical study, the author first develops an FCI with fixed weights for comparison, constructs a post-crisis FCI based on time-varying parameter vector autoregressive model and finally examines the FCI with time-varying weights concerning its explanatory and predictive power for inflation. Findings Results suggest that the FCI with time-varying weights performs better than one with fixed weights and the former better reflects China’s financial conditions. Furthermore, introduction of credit availability improves the FCI. Originality/value FCI constructed in this paper goes ahead of inflation by about 11 months, and it has strong explanatory and predictive power for inflation. Constructing an appropriate FCI is important for improving the effectiveness and predictive power of the post-crisis monetary policy and foe achieving both economic and financial stability.