Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/319408 
Year of Publication: 
2019
Citation: 
[Journal:] China Political Economy (CPE) [ISSN:] 2516-1652 [Volume:] 2 [Issue:] 2 [Year:] 2019 [Pages:] 258-276
Publisher: 
Emerald, Leeds
Abstract: 
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.
Subjects: 
Credit availability
Financial conditions index (FCI)
Time-varying weight
TVP-VAR model
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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