How We Monitor and Control the Risks of Real Economy and Financial Markets
FANG Yi, CHEN Ziyu, JIA Yanyan
National School of Development and Strategy, Renmin University of China; School of Finance, Central University of Finance and Economics; School of Finance, Tianjin University of Finance and Economics
Summary:
“Stabilizing growth” refers to maintaining steady economic growth, while “risk prevention” refers to safeguarding against financial risks. Finance is at the core of the modern economy, and maintaining financial stability while preventing financial risks is crucial for ensuring high-quality economic development. Conversely, stable economic development helps to prevent and resolve various risks that may arise during economic operations. However, achieving the goals of stabilizing growth and preventing risks is challenging. First, the goal of “stabilizing growth” faces challenges. In recent years, China's economy has experienced some downward pressure, making it urgent to ensure healthy and stable economic growth, highlighting the need to identify economic downturn risks especially important. In terms of investment, since the onset of the “new normal” in the economy, the country's growth rate has shifted gears, and corporate profitability has declined, reducing corporate investment willingness. On the consumption side, the slowdown in residents' income growth has led to a deceleration in consumption growth. Second, achieving the “risk prevention” goal should not be taken lightly. The negative impacts of the global pandemic have not yet dissipated, and geopolitical conflicts continue to escalate, exacerbating financial fragility risks globally. Financial markets, as high-frequency trading markets, are highly susceptible to external shocks, with risks rapidly rising in a short period. This paper proposes two objectives: First, to dynamically monitor the risk status and risk spillovers in the real economy and financial markets and, from a network perspective, identify periods of high risk in both, thus determining whether a focus on stabilizing growth or preventing risks is needed during different periods. Second, after identifying the policy regulation targets for different periods, this paper explores the effects of various macroeconomic policies to implement the optimal regulatory policies during each period. To achieve this, the paper first employs a mixed-frequency risk spillover approach to construct risk spillover indicators, using these indicators to assess the spillover relationship between the financial market and the real economy. Second, it uses the Markov regime-switching model to identify high-and low-risk states in both the financial market and the real economy. By combining the net risk spillover indicators between the financial market and the real economy with high-risk state indicators, the paper identifies other periods for “stabilizing growth” or “preventing risks” to address risk warning issues over time. Finally, the paper uses a TVP-VAR model to examine the regulatory effects of different types of macroeconomic policies during various periods, providing recommendations for policymakers on implementing macroeconomic policies. The main contributions of this paper include two aspects: First, it explicitly defines the conditions for “stabilizing growth” and “preventing risks” periods. The paper argues that two prerequisites must be met: 1) stabilizing growth cannot come at the cost of significantly increasing financial risks, and preventing risks must also consider stable economic development, with coordination between the two objectives; 2) policymakers should focus on extreme risks when implementing regulatory measures and avoid frequent interventions. Second, it compares and analyzes the effects of different types of policies during various periods. The paper innovatively uses the TVP-VAR model to examine how monetary and fiscal policies affect risk spillovers and volatility between the financial market and the real economy during different periods. By comparing the implementation effects of different economic policies, the paper contributes to providing theoretical guidance for macroeconomic policy regulation aimed at “stabilizing growth” and “preventing risks.” Based on the empirical analysis, the paper suggests that, in the short term, efforts to prevent systemic risks in the economic and financial network should focus on the financial market, while in the long term, the emphasis should shift to the real economy. For short-term regulation of systemic risks, attention should be directed toward the frequent fluctuations of the financial market. Conversely, for long-term regulation, the focus should be on the long-term trend changes in real economy risks. Additionally, during “stabilizing growth” periods, efforts should primarily focus on stabilizing industrial growth, while in “preventing risks” periods, priority should be given to preventing risks in the stock market. Finally, volatility and net risk spillover indicators can be combined to provide timely risk warnings. To ensure the effectiveness of policy regulation, interventions should target relatively extreme risks and should not be too frequent, with different focuses during different periods.
方意, 陈姿羽, 贾妍妍. 实体经济与金融市场的风险监测与调控[J]. 金融研究, 2025, 541(7): 1-20.
FANG Yi, CHEN Ziyu, JIA Yanyan. How We Monitor and Control the Risks of Real Economy and Financial Markets. Journal of Financial Research, 2025, 541(7): 1-20.
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