Study on Finance Condition Index and Asset Price Channel of Monetary Policy in China

The paper constructs the finance condition index based VECM and forecasts the inflation in China by making using of FCI. It finds that FCI containing the asset price information can make a timely and effective forecast of inflation even on the condition of the frequent fluctuation of current financial market and asset prices,which implies that the assets have more important effects on the economy. Therefore,the central bank must pay an attention to the effects of asset prices on monetary policy when putting monetary policy into practice. When analyzing the asset price channel of monetary policy by FCI,it shows that asset prices have limited effects on the output.Therefore,it should focus on the effect of the changes of asset prices on inflation when implementing monetary policy.However,at present the asset prices shouldn't be regarded as a real operating indicator of monetary policy because asset prices can't take a sufficient reaction to the monetary policy.