Characterising the Financial Cycle: A Multivariate and Time-Varying Approach

56 Pages Posted: 23 Sep 2015

See all articles by Yves Stephan Schüler

Yves Stephan Schüler

Deutsche Bundesbank

Paul Hiebert

European Central Bank (ECB)

Tuomas A. Peltonen

European Central Bank (ECB)

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Date Written: September 22, 2015

Abstract

We introduce a methodology to characterise financial cycles combining a novel multivariate spectral approach to identifying common cycle frequencies across a set of indicators, and a time varying aggregation emphasising systemic developments. The methodology is applied to 13 European Union countries as well a synthetic euro area aggregate, based on a quarterly dataset spanning 1970-2013. Results suggest that credit and asset prices share cyclical similarities, which, captured by a synthetic financial cycle, outperform the credit-to-GDP gap in predicting systemic banking crises on a horizon of up to three years. Financial cycles tend to be long, particularly in upswing phases and with important dispersion across country cases. Concordance of financial and business cycles is observed only 2/3 of the time. While a similar degree of concordance for financial cycles is apparent across countries, heterogeneity is high – whereby a cluster of countries tends to exhibit a high synchronisation in their financial cycle phases.

Keywords: financial cycle, spectral analysis, power cohesion, macroprudential policy

JEL Classification: E30, E40, C54

Suggested Citation

Schüler, Yves Stephan and Hiebert, Paul and Peltonen, Tuomas A., Characterising the Financial Cycle: A Multivariate and Time-Varying Approach (September 22, 2015). ECB Working Paper No. 1846, Available at SSRN: https://ssrn.com/abstract=2664126

Yves Stephan Schüler (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Paul Hiebert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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