Modeling the Business and Financial Cycle in a Multivariate Structural Time Series Model

44 Pages Posted: 24 Oct 2017

See all articles by Jasper de Winter

Jasper de Winter

De Nederlandsche Bank

Siem Jan Koopman

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

Irma Hindrayanto

De Nederlandsche Bank

Anjali Chouhan

Independent

Date Written: October 16, 2017

Abstract

We consider a multivariate unobserved component time series model to disentangle the short-term and medium-term cycle for the G7 countries and the Netherlands using four key macroeconomic and financial time series. The novel aspect of our approach is that we simultaneously decompose the short-term and medium-term dynamics of these variables by means of a combination of their estimated cycles. Our results show that the cyclical movements of credit volumes and house prices are mostly driven by the medium-term cycle, while the macroeconomic variables are equally driven by the short-term and medium-term cycle. For most countries, the co-movement between the cycles of the financial and macroeconomic variables is mainly present in the medium-term. First, we find strong co-cyclicality between the medium-term cycles of house prices and GDP in all countries we analyzed. Second, the relation between the medium-term cycles of GDP and credit is more complex. We find strong concordance between both cycles in only three countries. However, in three other countries we find ‘indirect’ concordance, i.e. the medium-term cycles of credit and house prices share co-cyclicality, while in turn the medium-term cycles of house prices and GDP share commonality. This outcome might indicate that the house price cycle is – at least partly – driven by the credit cycle. Lastly, the cross-country concordance of both the short-term cycles and the medium-term cycles of GDP, house prices and credit is low. Hence, the bulk of the cyclical movements seem to be driven by domestic rather than global factors.

Keywords: Unobserved Component Time Series Model, Kalman Filter, Maximum Likelihood Estimation, Short-Term And Medium-Term Cycles

JEL Classification: C32, E32, G01

Suggested Citation

de Winter, Jasper and Koopman, Siem Jan and Hindrayanto, Irma and Chouhan, Anjali, Modeling the Business and Financial Cycle in a Multivariate Structural Time Series Model (October 16, 2017). De Nederlandsche Bank Working Paper No. 573. Available at SSRN: https://ssrn.com/abstract=3057349 or http://dx.doi.org/10.2139/ssrn.3057349

Jasper de Winter (Contact Author)

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

Irma Hindrayanto

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Anjali Chouhan

Independent ( email )

No Address Available

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