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Characterization of the Chilean Financial Cycle, Early Warning Indicators and Implications for Macro-Prudential Policies

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  • Juan Francisco Martínez
  • Daniel Oda

Abstract

The latest financial crisis has posed several challenges for policymakers about prevention and mitigation measures regarding these episodes. In this respect, the Basel Committee of Banking Supervision (BCBS) has issued a set of recommendations of macro-prudential policies that have been applied in several economies by accommodating them to their local context. In particular, it emerges the Countercyclical Capital Buffer (CCyB) and the Credit-to-GDP gap as a reference for its activation. In this context, this paper describes the Chilean issues relevant to its application, such as the structure of the credit portfolio, changes in macroeconomic and financial cycles, and data restrictions. Then, a set of early warning indicators (EWI) which conforms to these local particularities is proposed. To do this, we analyze and solve some important limitations in the calculation of these metrics: information gaps, coherence to domestic financial structure, and excessive amplitude of local past episodes of fragility. Finally, we discuss some remaining challenges for the application of CCyB in Chile.

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  • Juan Francisco Martínez & Daniel Oda, 2018. "Characterization of the Chilean Financial Cycle, Early Warning Indicators and Implications for Macro-Prudential Policies," Working Papers Central Bank of Chile 823, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:823
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    2. Fraccaroli, Nicolò & Giovannini, Alessandro & Jamet, Jean-François & Persson, Eric, 2022. "Ideology and monetary policy. The role of political parties’ stances in the European Central Bank’s parliamentary hearings," European Journal of Political Economy, Elsevier, vol. 74(C).
    3. Zsuzsanna Hosszu & Gergely Lakos, 2022. "Early Warning Performance of Univariate Credit-to-GDP Gaps," MNB Occasional Papers 2022/142, Magyar Nemzeti Bank (Central Bank of Hungary).
    4. Yusuf Yıldırım & Anirban Sanyal, 2022. "Evaluating the Effectiveness of Early Warning Indicators: An Application of Receiver Operating Characteristic Curve Approach to Panel Data," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 69(4), pages 557-597, December.
    5. Jorge E. Galán, 2019. "Measuring credit-to-gdp gaps. The hodrick-prescott filter revisited," Occasional Papers 1906, Banco de España.
    6. An, Hui & Wang, Hao & Delpachitra, Sarath & Cottrell, Simon & Yu, Xiao, 2022. "Early warning system for risk of external liquidity shock in BRICS countries," Emerging Markets Review, Elsevier, vol. 51(PA).
    7. Byron J. Idrovo-Aguirre & Francisco J. Lozano & Javier E. Contreras-Reyes, 2021. "Prosperity or Real Estate Bubble? Exuberance Probability Index of Real Housing Prices in Chile," IJFS, MDPI, vol. 9(3), pages 1-24, September.

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