Construction of China’s Financial Stability Index in the New Normal Structure and Analysis of Its Regional Relationship with US Monetary Policy

Abstract

Abstract: In the early years, the stability of China’s finance was deeply affected by the international political and economic structure. In addition, the Sino-US, Japan-Korea and other bilateral trade disputes over recent years continue to escalate, and the capital market has been the first to bear the outcome. But how come China’s finance become more stable despite the external impacts? First of all, this paper selects fourteen indicators from three situations including domestic and foreign environments and four major financial markets with the help of the State Space Model, and builds a comprehensive financial stability index to measure the financial stability of China from December 2009 to December 2018, and analyzes typical events of China’s financial market which caused economic fluctuation. At the same time, this paper analyzes the trend chart of the financial stability index and the consumer price index from the previous month, and finds that the index constructed by this paper is about 1-3 months ahead of the CPI MoM. Then, an empirical study using the Vector Autoregressive Model of Markov Regime Switching finds that there is a regional shift in changes between US monetary policy and China’s financial stability: From December 2009 to September 2014, changes in the US consumer price index have a greater impact on China’s financial stability for a longer period; from September 2014 to December 2018, the adjustment of the federal funds rate has a more significant impact on China’s financial stability, but the magnitude of the impact decreases and the impact period is shortened to 5 months. This shows that since the “new normal of economy” was proposed, China’s financial stability has improved, and at the same time, the impact of changes in US monetary policy on China’s financial stability has declined. This research has guiding significance for China’s financial stability and development.

Key words: financial stability index, US monetary policy, state space model, Vector Autoregressive Model of Markov Regime Switching (MS-VAR), impulse response

Chai Jian, Wang Ziyang, Zhang Zhongyu. Construction of China’s Financial Stability Index in the New Normal Structure and Analysis of Its Regional Relationship with US Monetary Policy[J]. Management Review, 2022, 34(8): 3-14.

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