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A study of financial cycles and the macroeconomy in Taiwan

Author

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  • Han-Liang Cheng

    (Central Bank of the ROC)

  • Nan-Kuang Chen

    (Central Bank of the ROC
    National Taiwan University)

Abstract

This paper studies the characteristics of financial cycles (credit and house prices) and their interactions with business cycles in Taiwan. We employ multivariate structural time series model to estimate trend and cyclical components in real bank credit, real house prices, and real GDP. We find that financial cycles are roughly twice the length of the business cycles, and house price cycles lead both credit and business cycles. Nevertheless, the estimated length of business and financial cycles in Taiwan is much shorter than those in industrialized economies. We then use machine learning to evaluate the importance of a macroeconomic variable that predicts downturns of financial cycles, by conducting both in-sample fitting and out-of-sample forecasting. Those macrovariables selected by machine learning reflects Taiwan’s close linkage in trades and financial interdependence with other countries such as China and spillover effects from the Fed’s monetary policy.

Suggested Citation

  • Han-Liang Cheng & Nan-Kuang Chen, 2021. "A study of financial cycles and the macroeconomy in Taiwan," Empirical Economics, Springer, vol. 61(4), pages 1749-1778, October.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:4:d:10.1007_s00181-020-01926-z
    DOI: 10.1007/s00181-020-01926-z
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    Cited by:

    1. Charles Ka Yui Leung & Edward Chi Ho Tang, 2023. "The dynamics of the house price‐to‐income ratio: Theory and evidence," Contemporary Economic Policy, Western Economic Association International, vol. 41(1), pages 61-78, January.
    2. Zheng Zheng Li & Chi-Wei Su, 2023. "How does real estate market react to the iron ore boom in Australian capital cities?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 71(2), pages 517-537, October.

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    More about this item

    Keywords

    Financial cycle; Credit; House prices; Wavelet analysis; Machine learning;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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