The measurement of financialization and its dynamic relevance with the real economy growth: A TVP-VAR analysis

Recently, the imbalance between the development of the real economy and the financial industry has intensified, which restricted economic growth and financial development. Therefore, this paper attempts to measure the level of financialization and analyze its dynamic relevance with the real economy. On the one hand, we select sub-indicators representing the generalized financial sector and use the TVP-VAR model to calculate the dynamic weights for constructing the comprehensive index (FI). The fluctuation characteristics of FI maintained high and moderate levels for a relatively short period, while it had a higher probability and longer duration at a low level, which indicates that the development of financialization has inertia and stability. On the other hand, impulse response results of the TVP-VAR model confirm that there is a dynamic relevance between financialization and the real economy. Specifically, a moderate level of financialization is conducive to the growth of the real economy, while both insufficient and excessive levels of financialization are detrimental to economic growth. Finally, based on the examined results, we propose policy recommendations for expanding financial openness and optimizing the relationship between finance and the real economy growth.