Coherent financial cycles for G-7 countries: Why extending credit can be an asset

Yves Schüler, Tuomas Peltonen () and Paul Hiebert

No 43, ESRB Working Paper Series from European Systemic Risk Board

Abstract: Failing to account for joint dynamics of credit and asset prices can be hazardous for countercyclical macroprudential policy. We show that composite financial cycles, emphasising expansions and contractions common to credit and asset prices, powerfully predict systemic banking crises. Further, the joint consideration yields a more robust view on financial cycle characteristics, reconciling an empirical puzzle concerning cycle properties when using two popular alternative methodologies: frequency decompositions and standard turning point analysis. Using a novel spectral approach, we establish the following facts for G-7 countries (1970Q1-2013Q4): Relative to business cycles, financial cycles differ in amplitude and persistence – albeit with heterogeneity across countries. Average financial cycle length is around 15 years, compared with 9 years (6.7 excluding Japan) for business cycles. Still, country-level business and financial cycles relate occasionally. Across countries, financial cycle synchronisation is strong for most countries; but not for all. In contrast, business cycles relate homogeneously. JEL Classification: C54, E32, E44, E58, G01

Keywords: Financial cycle; Macroprudential policy; Spectral analysis (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-bec, nep-ifn and nep-mac
Note: 355041
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
https://www.esrb.europa.eu//pub/pdf/wp/esrbwp43.en.pdf (application/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:srk:srkwps:201743

Access Statistics for this paper

More papers in ESRB Working Paper Series from European Systemic Risk Board 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().