Abstract: Realizing the dual stability and coordinated development of economy and finance is an important task of macro policy control in the new era. By employing the factor expansion vector autoregressive model with time-varying parameters and the dynamic spillover index method, this paper conducts an analysis of the volatility characteristics of China’s financial cycle and its correlation with the economic cycle. The findings show that there is a complex interactive relationship between the financial cycle and the business cycle in China. On the whole, the spillover effect of financial volatility on economic volatility is relatively stronger, while the directional effect of economic volatility on financial volatility is relatively weaker. Furthermore, the counter-factual simulation analysis based on the time-varying parameter vector autoregressive model with potential threshold shows that the coordinated use of fiscal policy and monetary policy is helpful to realize the dual control goal of economic and financial stability. It is necessary to establish and improve the coordination mechanism between short-term efficacy of fiscal policy and long-term efficacy of monetary policy to suppress economic and financial fluctuations, and further strengthen the anticipatory adjustment and fine-tuning mechanism of the price-based monetary policy, so as to better deal with the internal and external financial shocks and achieve the coordinated and stable development of economy and finance.

Key words: financial cycle, business cycle, fiscal policy, monetary policy