Measuring the Financial Cycle in South Africa

Greg Farrell and Esti Kemp

South African Journal of Economics, 2020, vol. 88, issue 2, 123-144

Abstract: We measure the financial cycle of South Africa using three different methodologies. The financial cycle is identified using credit, house prices and equity prices as indicators, and estimated using traditional turning‐point analysis, frequency‐based filters and an unobserved components model‐based approach. We then consider the financial cycle’s main characteristics and examine its relationships with the business cycle. We confirm the presence of a financial cycle in South Africa that has a longer duration and a larger amplitude than the traditional business cycle. Developments in measures of credit and house prices are important indicators of the financial cycle, although the case for including equity prices in the measures is less certain. Periods where financial conditions are stressed are associated with peaks in the financial cycle, suggesting that the estimated financial cycle may have similar leading indicator properties to financial conditions or stress indices.

Date: 2020
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