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The Financial Cycle Indexes for Early Warning Exercise

Author

Listed:
  • Koichiro Kamada

    (Bank of Japan)

  • Kentaro Nasu

    (Bank of Japan)

Abstract

This paper introduces financial cycle indexes and uses them in an early warning exercise. The indexes are based on the traditional theory of business cycles. Juglar cycles are deduced from a number of financial indicators, categorized as leading and lagging indicators, and aggregated into leading and lagging indexes. We constructed Japanese financial cycle indexes and found that they warn of the current global financial crisis about a year in advance. However, the result should be interpreted with caution, since the indexes fail to take into consideration the uncertainty surrounding real-time problems and the potential delays that may be caused by policy judgment. As a solution, we propose a scheme to forecast financial cycle indexes. According to the test results based on the Japanese data, our scheme gives advance warning of the ongoing global financial crisis.

Suggested Citation

  • Koichiro Kamada & Kentaro Nasu, 2011. "The Financial Cycle Indexes for Early Warning Exercise," Bank of Japan Working Paper Series 11-E-1, Bank of Japan.
    • Handle: RePEc:boj:bojwps:11-e-1
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2011/data/wp11e01.pdf
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    References listed on IDEAS

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    1. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
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    1. Tran, Thuy Nhung, 2022. "The Volatility of the Stock Market and Financial Cycle: GARCH Family Models," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(1), pages 151-168.
    2. Adél Bosch & Steven F. Koch, 2020. "The South African Financial Cycle and its Relation to Household Deleveraging," South African Journal of Economics, Economic Society of South Africa, vol. 88(2), pages 145-173, June.

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