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Characterising the financial cycle in Luxembourg

Author

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  • Gaston Giordana
  • Sabbah Gueddoudj

Abstract

This paper characterises the financial cycle in Luxembourg using both the growth and classical cycle definitions. We implement both a frequency-based approach -using band-pass filters- to measure the growth cycle and a turning-point approach to capture the classical cycle. The financial cycle is characterized using varibales related to domestic credit and asset prices. We identify the dates of peaks/troughs for growth and classical cycles, describe the characteristics of cycle phases and analyze the synchronisation between cycles for each macro-financial variable considered and the real activity. Additionally, we evaluate the synchronisation of credit and house prices across the neighbouring countries, based on the medium-term classical cycle. Finally, we introduce two novel tools to monitor the evolution of the financial cycle which are intended to contribute to informing macroprudential policy. The first tool is an optimal decision rule in the form of two warning thresholds signalling growth cycle phases related to a possible classical turning­point. The second tool is a measure of the probability of a turning­point in the classical cycle in each quarter after a peak in the growth cycle. The tools are built on the lead/lag relationships between peaks and troughs of growth and classical cycles. A composite index of the growth cycle is proposed as well.

Suggested Citation

  • Gaston Giordana & Sabbah Gueddoudj, 2016. "Characterising the financial cycle in Luxembourg," BCL working papers 103, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp103
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    File URL: https://www.bcl.lu/en/publications/Working-papers/103/BCLWP103.pdf
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    References listed on IDEAS

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    Cited by:

    1. Paolo Guarda & Alban Moura, 2019. "Measuring real and financial cycles in Luxembourg: An unobserved components approach," BCL working papers 126, Central Bank of Luxembourg.

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    More about this item

    Keywords

    financial cycles; turning­points; synchronisation; band­pass filter; survival data; Area Under the Receiver Operating Characteristic Curve; Luxembourg.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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