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Coherent financial cycles for G-7 countries: Why extending credit can be an asset

Author

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  • Schüler, Yves S.
  • Peltonen, Tuomas A.
  • Hiebert, Paul

Abstract

Failing to account for joint dynamics of credit and asset prices can be hazardous for countercyclical macroprudential policy. We show that composite financial cycles, emphasising expansions and contractions common to credit and asset prices, powerfully predict systemic banking crises. Further, the joint consideration yields a more robust view on financial cycle characteristics, reconciling an empirical puzzle concerning cycle properties when using two popular alternative methodologies: frequency decompositions and standard turning point analysis. Using a novel spectral approach, we establish the following facts for G-7 countries (1970Q1-2013Q4): Relative to business cycles, financial cycles differ in amplitude and persistence – albeit with heterogeneity across countries. Average financial cycle length is around 15 years, compared with 9 years (6.7 excluding Japan) for business cycles. Still, country-level business and financial cycles relate occasionally. Across countries, financial cycle synchronisation is strong for most countries; but not for all. In contrast, business cycles relate homogeneously. JEL Classification: C54, E32, E44, E58, G01

Suggested Citation

  • Schüler, Yves S. & Peltonen, Tuomas A. & Hiebert, Paul, 2017. "Coherent financial cycles for G-7 countries: Why extending credit can be an asset," ESRB Working Paper Series 43, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201743
    Note: 355041
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrbwp43.en.pdf
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    More about this item

    Keywords

    Financial cycle; Macroprudential policy; Spectral analysis;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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