Measuring Financial Cycle Time

32 Pages Posted: 7 Jan 2019

See all articles by Andrew J. Filardo

Andrew J. Filardo

Bank for International Settlements (BIS) - Monetary and Economic Department

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Marek Raczko

Bank of England

Date Written: November 14, 2018

Abstract

Motivated by the traditional business cycle approach of Burns and Mitchell (1946), we explore cyclical similarities in financial conditions over time in order to improve our understanding of financial cycles. Looking back at 120 years of data, we find that financial cycles exhibit behaviour characterised by recurrent, endogenous swings in financial conditions, which result in costly booms and busts. Yet the recurrent nature of such swings may not appear so obvious when looking at conventionally plotted time-series data (that is, observed in calendar time). Using the pioneering framework developed by Stock (1987), we offer a new statistical characterisation of the financial cycle using a continuous-time autoregressive model subject to time deformation, and test for systematic differences between calendar and a new notion of financial cycle time. We find the time deformation to be statistically significant, and associated with levels of long-term real interest rates, inflation volatility and the perceived riskiness of the macro-financial environment. Implications for statistical modelling, endogenous risk-taking economic behaviour and policy are highlighted.

Keywords: financial cycles, continuous-time autoregressive models, time deformation, behavioural economics, endogenous risk-taking behaviour, central banking

JEL Classification: E32, G01, F32, F34, E58, E71, D80

Suggested Citation

Filardo, Andrew J. and Lombardi, Marco Jacopo and Raczko, Marek Andrzej, Measuring Financial Cycle Time (November 14, 2018). BIS Working Paper No. 755. Available at SSRN: https://ssrn.com/abstract=3302305

Andrew J. Filardo (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Marco Jacopo Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Marek Andrzej Raczko

Bank of England ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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