Measuring Financial Cycles with a Model-Based Filter: Empirical Evidence for the United States and the Euro Area

27 Pages Posted: 27 Jan 2016

See all articles by Gabriele Galati

Gabriele Galati

De Nederlandsche Bank

Irma Hindrayanto

De Nederlandsche Bank

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Marente Vlekke

CPB Netherlands Bureau of Economic Policy Analysis

Date Written: January 26, 2016

Abstract

The financial cycle captures systematic patterns in the financial system and is closely related to the concept of procyclicality of systemic risk. This paper investigates the characteristics of financial cycles using a multivariate model-based filter. We extract cycles using an unobserved components time series model and applying state space methods. We estimate financial cycles for the United States, Germany, France, Italy, Spain and the Netherlands, using data from 1970 to 2014. For these countries, we find that the individual financial variables we examine have medium-term cycles which share a few common statistical properties. We therefore refer to these cycles as 'similar'. We find that overall financial cycles are longer than business cycles and have a higher amplitude. Moreover, such behavior varies over time and across countries. Our results suggest that estimates of the financial cycle can be a useful monitoring tool for policymakers as they may provide a broad indication about when risks to financial stability increase, remain stable, or decrease.

Keywords: unobserved component models, state space method, maximum likelihood, bandpass filter, short and medium term cycles

JEL Classification: C22, C32, E30, E50, E51, G01

Suggested Citation

Galati, Gabriele and Hindrayanto, Irma and Koopman, Siem Jan and Vlekke, Marente, Measuring Financial Cycles with a Model-Based Filter: Empirical Evidence for the United States and the Euro Area (January 26, 2016). De Nederlandsche Bank Working Paper No. 495. Available at SSRN: https://ssrn.com/abstract=2722547 or http://dx.doi.org/10.2139/ssrn.2722547

Gabriele Galati (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Irma Hindrayanto

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Marente Vlekke

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

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