Financial Condition Index and Monetary Policy Reaction Function’s Empirical Test in China

Firstly,using the state space model,This paper constructs a financial condition index(FCI) of timevarying coefficients for China.The results show that the FCI has good predictive ability of future output and inflation rate.Following this,as a indicator of accommodative level of the overall financial situation,we add the FCI into the monetary policy reaction function,and find that,although Taylor Rule lacks the internal stability, compared to McCallum Rule,the reaction of policy instrument of Taylor Rule to the FCI gap shows counter-cyclical characteristic,and its fitting result is well.