Financial Soundness Indicator, Financial Cycle, Credit Cycle and Business Cycle£­Evidence from Taiwan

Yuan Chang

International Journal of Economics and Finance, 2016, vol. 8, issue 4, 166-182

Abstract: Business cycle is the repeated expansions (from trough to peak) and contractions (from peak to trough) of real economic activity. Credit cycle is the cyclical process of the bank credit, ranging from short/long-term, loan to enterprise and loan to individual. Financial cycle reflects ups and downs in asset prices and financial institution's balance sheet. This paper examines the linkage among cycles as well as their lead-lag relationship. Theoretically, credit cycle is one of reasons driving business cycle, and financial cycle is a fundamental cause of credit cycle. Based on Taiwan¡¯s quarterly data, this paper firstly identifies cyclical behavior of indicators of real economic activity, bank credit and assets prices in recent decade by defining expansion phases and contraction phases of cyclical variables. Second, this paper calculates concordance index to examine the degree of synchronization among cycles. Third, while the soundness for assets and liabilities of financial institution may drive financial cycle, this paper employs IMF¡¯s Financial Soundness Indicator (FSI) as predictor of expansion and contraction phase of cyclical variables. Specifically, the paper assesses the health of bank¡¯s balance sheet variables by Probit estimation on linkage between FSIs and expansion/contraction phase of cycle. Based on empirical evidence, the knowledge about the extent of assets/liability condition of financial institution corresponding to the expansion and contraction phase of financial, credit and business cycle is enhanced. Authority concerning about financial stability should oversight the performance of FSIs and then engage in prompt corrective actions when the level and volatility of those indicators sharply.

Keywords: financial soundness indicator; financial cycle; credit cycle; business cycle (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://ccsenet.org/journal/index.php/ijef/article/view/58393/31214 (application/pdf)
http://ccsenet.org/journal/index.php/ijef/article/view/58393 (text/html)

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:ibn:ijefaa:v:8:y:2016:i:4:p:166-182

Access Statistics for this article

More articles in International Journal of Economics and Finance from Canadian Center of Science and Education Contact information at EDIRC.
Bibliographic data for series maintained by Canadian Center of Science and Education ().