Measuring financial cycle time
Marco Lombardi () and
No 755, BIS Working Papers from Bank for International Settlements
Motivated by the traditional business cycle approach of Burns and Mitchell (1946), we explore cyclical similarities in financial conditions over time in order to improve our understanding of financial cycles. Looking back at 120 years of data, we find that financial cycles exhibit behaviour characterised by recurrent, endogenous swings in financial conditions, which result in costly booms and busts. Yet the recurrent nature of such swings may not appear so obvious when looking at conventionally plotted time-series data (that is, observed in calendar time). Using the pioneering framework developed by Stock (1987), we offer a new statistical characterisation of the financial cycle using a continuous-time autoregressive model subject to time deformation, and test for systematic differences between calendar and a new notion of financial cycle time. We find the time deformation to be statistically significant, and associated with levels of long-term real interest rates, inflation volatility and the perceived riskiness of the macro-financial environment. Implications for statistical modelling, endogenous risk-taking economic behaviour and policy are highlighted.
Keywords: financial cycles; continuous-time autoregressive models; time deformation; behavioural economics; endogenous risk-taking behaviour; central banking (search for similar items in EconPapers)
JEL-codes: E32 G01 F32 F34 E58 E71 D80 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
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Working Paper: Measuring financial cycle time (2019)
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