Modelling the Impact of Aggregate Financial Shocks External to the Chinese Economy

47 Pages Posted: 19 Oct 2012

See all articles by Duo Qin

Duo Qin

University of London - Department of Economics, SOAS

Xinhua He

Chinese Academy of Social Science - Institute of World Economics and Politics

Date Written: October 18, 2012

Abstract

Ways of extracting financial condition indices (FCI) are explored and alternative FCIs external to the Chinese economy are constructed to model their predictive content. The exploration aims at highlighting the rich and varied dynamic features of financial variables underlying FCIs and the importance of synchronising dynamic information between FCIs and the real-sector variables to be forecasted. The modelling experiment aims at improving the forecasting model upon which the FCIs are assessed. Four variables are chosen as the likely macro channel of the FCIs affecting the Chinese economy. It is found that the FCI-led models enjoy forecasting advantages over a benchmark model in three out of the four variables, although the benchmark model is not dominated by the FCI-led models when judged by in-sample encompassing tests. The evidence indicates the increasing exposure of the Chinese economy to the global financial conditions.

Keywords: financial index, dynamic factor, VAR, error correction, encompassing

JEL Classification: E17, F37, G17, C43

Suggested Citation

Qin, Duo and He, Xinhua, Modelling the Impact of Aggregate Financial Shocks External to the Chinese Economy (October 18, 2012). BOFIT Discussion Paper No. 25/2012, Available at SSRN: https://ssrn.com/abstract=2163531 or http://dx.doi.org/10.2139/ssrn.2163531

Duo Qin (Contact Author)

University of London - Department of Economics, SOAS ( email )

Thomhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

Xinhua He

Chinese Academy of Social Science - Institute of World Economics and Politics ( email )

Beijing
China

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