Estimation of the Financial Cycle with a Rank-Reduced Multivariate State-Space Model

Rob Luginbuhl ()
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Rob Luginbuhl: CPB Netherlands Bureau for Economic Policy Analysis

No 409, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: We propose a model-based method to estimate a unique financial cycle based on a rank-restricted multivariate state-space model. This permits us to use mixed-frequency data, allowing for longer sample periods. In our model the financial cycle dynamics are captured by an unobserved trigonometric cycle component. We identify a single financial cycle from the multiple time series by imposing rank reduction on this cycle component. The rank reduction can be justified based on a principal components argument. The model also includes unobserved components to capture the business cycle, time-varying seasonality, trends, and growth rates in the data. In this way we can control for these effects when estimating the financial cycle. We apply our model to US and Dutch data and conclude that a bivariate model of credit and house prices is sufficient to estimate the financial cycle.

JEL-codes: E5 F3 G01 G15 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-ets, nep-isf and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:cpb:discus:409

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