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Business And Financial Cycle In Indonesia: An Integrated Approach

Author

Listed:
  • Cicilia Anggadewi Harun

    (Bank Indonesia)

  • Wishnu Mahraddika

    (Bank Indonesia)

  • Jati Waluyo

    (Bank Indonesia)

  • Pakasa Bary

    (Bank Indonesia)

  • Rieska Indah Astuti

    (Bank Indonesia)

  • Fauzan Rachman

    (Bank Indonesia)

  • Rizky Primayudha

    (Bank Indonesia)

  • Dwi Oktaviyanti

    (Bank Indoensia)

  • Euis Aqmaliyah

Abstract

This study discusses business cycle and financial cycle in Indonesia. In the first stage, the multivariate Kalman Filter estimation is carried out on the output gap and credit gap specifications which are derived by considering the IS curve, dominant currency pricing, financial frictions, and credit shocks. In the second stage, the financial cycle is constructed via common cycles and principal components by combining various financial indicators, including indicators of total credit obtained based on the results in the previous stage, asset prices, risk taking, banking indicators, corporate leverage, external exposure, and risk appetite. Based on several evaluation metrics, the resulting business and financial cycle are consistent to the dynamics of economic and financial conditions in Indonesia, which were triggered either by domestic or external events. The business cycle and financial cycle have been shown to have similar characteristics, although financial cycle has a longer average duration.

Suggested Citation

  • Cicilia Anggadewi Harun & Wishnu Mahraddika & Jati Waluyo & Pakasa Bary & Rieska Indah Astuti & Fauzan Rachman & Rizky Primayudha & Dwi Oktaviyanti & Euis Aqmaliyah, 2021. "Business And Financial Cycle In Indonesia: An Integrated Approach," Working Papers WP/05/2021, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp052021
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Business cycle; financial cycle; output gap; multivariate filtering; Kalman filter; principal component analysis; risk taking; dominant currency pricing; capital flows; commodity prices;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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