In this paper, we calculate the financial conditions index in China by principal component analysis and investigate the fluctuation characteristics of China’s financial cycle. The results show that, the FCI fluctuates prior to macroeconomic fluctuation, and there is an approximately 3-years short cycle in financial fluctuation which has the asymmetric characteristic with long-term expansion and short-term contraction. Furthermore, we study the influence of the financial cycle on inflation and output gap in China based on the time-varying parameter vector autoregressive model. We conclude that the "price effect” is more obvious than “output effect”, and the acceleration effect of improvement of the financial situation on inflation and economic fluctuation is more obvious than the negative effects of the deterioration of the financial situation. These studies provide useful experience for reference and policy implications in macroeconomic and financial reform in China.

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