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Characterising the financial cycle: a multivariate and time-varying approach

Author

Listed:
  • Hiebert, Paul
  • Peltonen, Tuomas A.
  • Schüler, Yves S.

Abstract

We introduce a methodology to characterise financial cycles combining a novel multivariate spectral approach to identifying common cycle frequencies across a set of indicators, and a time varying aggregation emphasising systemic developments. The methodology is applied to 13 European Union countries as well a synthetic euro area aggregate, based on a quarterly dataset spanning 1970-2013. Results suggest that credit and asset prices share cyclical similarities, which, captured by a synthetic financial cycle, outperform the credit-to-GDP gap in predicting systemic banking crises on a horizon of up to three years. Financial cycles tend to be long, particularly in upswing phases and with important dispersion across country cases. Concordance of financial and business cycles is observed only 2/3 of the time. While a similar degree of concordance for financial cycles is apparent across countries, heterogeneity is high JEL Classification: E30, E40, C54

Suggested Citation

  • Hiebert, Paul & Peltonen, Tuomas A. & Schüler, Yves S., 2015. "Characterising the financial cycle: a multivariate and time-varying approach," Working Paper Series 1846, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20151846
    Note: 339054
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    References listed on IDEAS

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    More about this item

    Keywords

    financial cycle; macroprudential policy; power cohesion; spectral analysis;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling

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