Abstract: Based on the IS curve and Phillips curve equation, this paper constructs the dynamic FCI in China by using the time-varying state space model and compares the time-varying effects of the financial variables on China's financial situation. Then we use the TVP-FAVAR model to investigate the macroeconomic effects of financial market volatility in China. Results show that the influence of money supply on the overall financial situation in China is gradually weakening, but the weight of exchange rate and interest rate is gradually increasing and China's financial market volatility from 1996 to 2016 experienced four distinct cycles. In the short run of financial market, there are " output effect" and " price effect", but neither of them exists in long term. In both the short and long term, the financial market has " crowding-out effect" on private consumption, while there is only short-term " crowding-out effect" on private investment. Besides, the impact of employment in the short term has a negative effect, but its long-term performance has a positive stimulus effect, and the impact of fiscal expenditure and international foreign exchange reserves has short-term negative effects.

Key Words: Financial Market Volatility; Financial Conditions Index (FCI); Macroeconomic Effect; Asset Prices; Monetary Policy