BUSINESS AND FINANCIAL CYCLE IN INDONESIA: AN INTEGRATED APPROACH

Cicilia Anggadewi Harun (), Wishnu Mahraddika (), Jati Waluyo (), Pakasa Bary, Rieska Indah Astuti (), Fauzan Rachman (), Rizky Primayudha (), Dwi Oktaviyanti () and Euis Aqmaliyah
Additional contact information
Cicilia Anggadewi Harun: Bank Indonesia
Wishnu Mahraddika: Bank Indonesia
Jati Waluyo: Bank Indonesia
Rieska Indah Astuti: Bank Indonesia
Fauzan Rachman: Bank Indonesia
Rizky Primayudha: Bank Indonesia
Dwi Oktaviyanti: Bank Indoensia

No WP/05/2021, Working Papers from Bank Indonesia

Abstract: This study discusses business cycle and financial cycle in Indonesia. In the first stage, the multivariate Kalman Filter estimation is carried out on the output gap and credit gap specifications which are derived by considering the IS curve, dominant currency pricing, financial frictions, and credit shocks. In the second stage, the financial cycle is constructed via common cycles and principal components by combining various financial indicators, including indicators of total credit obtained based on the results in the previous stage, asset prices, risk taking, banking indicators, corporate leverage, external exposure, and risk appetite. Based on several evaluation metrics, the resulting business and financial cycle are consistent to the dynamics of economic and financial conditions in Indonesia, which were triggered either by domestic or external events. The business cycle and financial cycle have been shown to have similar characteristics, although financial cycle has a longer average duration.

Keywords: Business cycle; financial cycle; output gap; multivariate filtering; Kalman filter; principal component analysis; risk taking; dominant currency pricing; capital flows; commodity prices (search for similar items in EconPapers)
JEL-codes: C32 C38 E32 E50 F30 F40 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2021
New Economics Papers: this item is included in nep-fdg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://publication-bi.org/repec/idn/wpaper/WP052021.pdf First version, 2021 (application/pdf)

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