Social Sciences in China (Chinese Edition)

No. 11, 2022

Measurement and Analysis of Financial Risk within a Unified Fiscal/Financial Framework: Based on a Nonlinear Network Connectedness Approach

(Abstract)

Yang Zihui and Chen Yutian

The previous financial risk prevention measures of the independent monetary policy framework now face multiple challenges. We urgently need to be guided by a systemic approach in strengthening the coordination of monetary and fiscal policy. Within a unified fiscal/financial framework, measurements introducing the nonlinear network method have identified the existence of network connectedness going from fiscal to monetary policy variables and thence to financial risk variables. Using the impulse response method of analysis, we find a positive relationship between fiscal expenditure and government debt, with the growth of local debt and urban investment debt increasing money supply. Findings from the nonlinear network connectedness method show that the network connectedness coefficient from the monetary variable to the systemic connectedness factor (0.15) is greater than that of the tail risk component (0.04), and network connectedness exists between tail risk factors and monetary policy variables. These findings not only provide empirical evidence for maintaining a systemic approach, but also give a comprehensive role to monetary and fiscal policy in the prevention of major risks.