Measuring Financial Stress and Vector Error Correction from a Global Flow of Funds Perspective

Zhang, Nan

This chapter constructs a statistical monitoring system and vector error correction model to measure risks to the global flow of funds (GFF). Taking China as a referent, we inspect how GFF and macroeconomic growth affected stability of financial systems and build statistical monitoring systems for GFF while referring to indicators of financial soundness. Then we link the real and financial economies and create a Chinese financial cycle index and financial stress index with regard to GFF. Third, VEC models observe how short-term fluctuations affect long-term equilibrium after external shocks. Fourth, we expand the empirical analysis based on these statistical methods and raise future issues for discussion.