Summary: The virtuous circle and healthy development of economy and finance is an important issue related to the overall situation of economic and financial development in China. The purpose of this paper is to fully understand the interaction mechanism between financial system and the macroeconomy, exploring the coordinated and stable development path of finance and economy from multiple perspectives.

Based on the TVP-FAVAR model, this paper constructs a dynamic financial condition index to measure the financial cycle in China. Further, this paper explores the fluctuation characteristics of financial cycle and the superposition mechanism of different frequency fluctuation components based on the wavelet transform method, and employs the frequency domain connectivity to empirically investigate the dynamic interaction between the financial cycle and the business cycle under different frequency bands.

The results show that: firstly, the financial cycle is superimposed by fluctuation components of different frequencies, among which the main cycle is expressed as the medium cycle fluctuation component of about 3 to 4 years, the high-frequency short cycle fluctuation only occurs during the global financial crisis driven by the fluctuation of various financial sub-markets, and the low-frequency long cycle fluctuation mainly comes from the fluctuation of credit, exchange rate and real estate market. Secondly, financial cycle has a significantly higher impact on business cycle, which is mainly manifested as a medium-term and short-term effect, while the impact of business cycle on financial cycle is significantly lower.

This paper provides useful experience and policy enlightenment for giving full play to the support and service functions of finance to the real economy and realizing the coordinated and stable development of economy as well as finance in the new era. First of all, it is necessary to comprehensively monitor the overall operation situation of the financial system and each financial sub market, distinguishing and identifying the resonance and superposition of the components of different frequency periodic waves. Secondly, while standardizing the financial investment of non-financial enterprises and actively guiding investors to make long-term value investment, efforts should also be made to drive the transformation and upgrading of the real economy with innovation, thus increasing the investment attraction of the real economy, so as to fundamentally reverse the trend of capital from the real to the virtual. Finally, we should further understand the law of the long-term and short-term effects of financial shocks on the real economy, proactively coordinating and matching the financial and economic development scale, so as to realize the short-term benign balance and long-term sustainable development of economy and finance.

Keywords: Financial Cycle; Business Cycle; Superposition Mechanism; Frequency Domain Connectedness