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The predictive content of financial cycle measures for output fluctuations

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  • Tim Ng
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Abstract

The financial cycle refers to fluctuations in perceptions and attitudes about financial risk over time. It is often marked by swings in credit growth, asset prices, terms of access to external funding, and other financial developments. A single measure that summarised such indicators would simplify analysis of the financial cycle, with benefits for both systemic risk assessment and stabilisation policy. It is not obvious, however, how best to select and combine the many potentially relevant indicators or how the usefulness of the resulting measure might be assessed. One criterion is predictive power. This special feature reviews the power of three differently composed measures to predict output fluctuations up to two years ahead. One of the measures is found to have substantial predictive content for output forecasting at short horizons. However, this result seems to arise mainly from the inclusion of indicators strongly related to actual financial system stress, rather than from swings in more generalised perceptions and attitudes about financial risk.

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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2011)
Issue (Month): (June)
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Handle: RePEc:bis:bisqtr:1106g

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  1. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
  2. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, American Economic Association, vol. 93(4), pages 1216-1239, September.
  3. Marco Terrones & M. Ayhan Kose & Stijn Claessens, 2008. "What Happens During Recessions, Crunches, and Busts?," IMF Working Papers 08/274, International Monetary Fund.
  4. Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
  5. Stéphanie Guichard & David Haugh & David Turner, 2009. "Quantifying the Effect of Financial Conditions in the Euro Area, Japan, United Kingdom and United States," OECD Economics Department Working Papers 677, OECD Publishing.
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Cited by:
  1. Björn Roye, 2014. "Financial stress and economic activity in Germany," Empirica, Springer, Springer, vol. 41(1), pages 101-126, February.
  2. Claudio Borio, 2012. "The financial cycle and macroeconomics: What have we learnt?," BIS Working Papers 395, Bank for International Settlements.

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