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Characterising the financial cycle: don't lose sight of the medium term!

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  • Mathias Drehmann
  • Claudio Borio
  • Kostas Tsatsaronis

Abstract

We characterise empirically the financial cycle using two approaches: analysis of turning points and frequency-based filters. We identify the financial cycle with the medium-term component in the joint fluctuations of credit and property prices; equity prices do not fit this picture well. We show that financial cycle peaks are very closely associated with financial crises and that the length and amplitude of the financial cycle have increased markedly since the mid-1980s. We argue that this reflects, in particular, financial liberalisation and changes in monetary policy frameworks. So defined, the financial cycle is much longer than the traditional business cycle. Business cycle recessions are much deeper when they coincide with the contraction phase of the financial cycle. We also draw attention to the "unfinished recession" phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 380.

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Length: 44 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:bis:biswps:380

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Keywords: financial cycle; business cycle; credit; asset prices; financial crises; medium-term;

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References

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  1. Sanvi Avouyi-Dovi & Julien Matheron, 2005. "Interactions between business cycles, financial cycles and monetary policy: stylised facts," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 273-98 Bank for International Settlements.
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Citations

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Cited by:
  1. Joshua Aizenman & Brian Pinto & Vladyslav Sushko, 2013. "Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute," BIS Working Papers 411, Bank for International Settlements.
  2. Paolo Gelain & Kevin J. Lansing & Caterina Mendicino, 2012. "House prices, credit growth, and excess volatility: Implications for monetary and macroprudential policy," Working Paper 2012/08, Norges Bank.
  3. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance & Francesco Saraceno, 2014. "Assessing the link between price and financial stability," Documents de Travail de l'OFCE 2014-02, Observatoire Francais des Conjonctures Economiques (OFCE).
  4. Haavio, Markus & Mendicino , Caterina & Punzi , Maria Teresa, 2013. "Financial and economic downturns in OECD countries," Research Discussion Papers 35/2013, Bank of Finland.
  5. Jérôme Creel & Paul Hubert & Fabien Labondance, 2013. "Financial stability and economic performance," Sciences Po publications 2013-24, Sciences Po.
  6. Claudio Borio, 2013. "On Time, Stocks and Flows: Understanding the Global Macroeconomic Challenges," National Institute Economic Review, National Institute of Economic and Social Research, vol. 225(1), pages R3-R13, August.
  7. Stolbov, Mikhail, 2012. "International credit cycles: a regional perspective," MPRA Paper 37773, University Library of Munich, Germany.
  8. Arnold, Bruce & Borio, Claudio & Ellis, Luci & Moshirian, Fariborz, 2012. "Systemic risk, macroprudential policy frameworks, monitoring financial systems and the evolution of capital adequacy," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3125-3132.
  9. Miroslav Plasil & Jakub Seidler & Petr Hlavac & Tomas Konecny, 2014. "An Indicator of the Financial Cycle in the Czech Economy," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2013/2014, chapter 0, pages 118-127 Czech National Bank, Research Department.
  10. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4oqi4ibn is not listed on IDEAS
  11. Jan Willem van den End, 2013. "A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio," DNB Working Papers 372, Netherlands Central Bank, Research Department.

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