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Characterization of the Chilean Financial Cycle, Early Warning Indicators and Implications for Macro-Prudential Policies

Juan Francisco Martínez and Daniel Oda

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: The latest financial crisis has posed several challenges for policymakers about prevention and mitigation measures regarding these episodes. In this respect, the Basel Committee of Banking Supervision (BCBS) has issued a set of recommendations of macro-prudential policies that have been applied in several economies by accommodating them to their local context. In particular, it emerges the Countercyclical Capital Buffer (CCyB) and the Credit-to-GDP gap as a reference for its activation. In this context, this paper describes the Chilean issues relevant to its application, such as the structure of the credit portfolio, changes in macroeconomic and financial cycles, and data restrictions. Then, a set of early warning indicators (EWI) which conforms to these local particularities is proposed. To do this, we analyze and solve some important limitations in the calculation of these metrics: information gaps, coherence to domestic financial structure, and excessive amplitude of local past episodes of fragility. Finally, we discuss some remaining challenges for the application of CCyB in Chile.

Date: 2018-07
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