Measuring Financial Cycle Length and Assessing Synchronization using Wavelets

Moisă Altăr (), Matei Kubinschi () and Dinu Barnea ()
Additional contact information
Moisă Altăr: Romanian-American University
Matei Kubinschi: Bucharest Academy of Economic Studies
Dinu Barnea: Bucharest Academy of Economic Studies

Journal for Economic Forecasting, 2017, issue 3, 18-36

Abstract: Identifying financial cycle dynamics is an important endeavor for researchers and policymakers alike, due to the new architecture of the macroprudential framework in which mitigating excessive credit growth, through countercyclical capital buffers, plays a central role in limiting the likelihood of future crises. The present paper focuses on measuring financial cycle length for a series of developed as well as emerging economies by applying Continuous Wavelet Transform (CWT) techniques, which have the ability to decompose time series on a wide range of frequencies and identify statistically significant cyclical behavior. Using credit-to-GDP data collected by the Bank for International Settlements (BIS) for 13 countries, our results confirm the established hypothesis that financial cycles are significantly longer than business cycles, in the case of developed economies, underpinning the European framework for setting the countercyclical buffer rates. Using Wavelet Coherence measures, we find statistically significant co-movement in time-frequency between several EU members, as well as tighter relationships between euro area members. The main conclusion is that policymakers from emerging economies should monitor financial cycle dynamics more closely, using the additional assumption of shorter cycles, in order to identify the build-up of systemic risk through excessive credit growth in a timely manner.

Keywords: wavelets; financial cycle; filtering; countercyclical capital buffer; macroprudential policy (search for similar items in EconPapers)
JEL-codes: C49 E32 E44 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.ipe.ro/rjef/rjef3_17/rjef3_2017p18-36.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rjr:romjef:v::y:2017:i:3:p:18-36

Access Statistics for this article

Journal for Economic Forecasting is currently edited by Lucian Liviu Albu and Corina Saman

More articles in Journal for Economic Forecasting from Institute for Economic Forecasting Contact information at EDIRC.
Bibliographic data for series maintained by Corina Saman ( this e-mail address is bad, please contact ).