BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 25/2012:
Modelling the impact of aggregate financial shocks external to the Chinese economy
Duo Qin ()
and Xinhua He
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; (follow links to similar papers)
JEL-Codes: C43; E17; F37; G17; (follow links to similar papers)
47 pages, October 18, 2012
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