Coherent Financial Cycles for G-7 Countries: Why Extending Credit Can Be an Asset

45 Pages Posted: 23 Dec 2014 Last revised: 8 Mar 2019

See all articles by Yves Stephan Schüler

Yves Stephan Schüler

Deutsche Bundesbank

Paul Hiebert

European Central Bank (ECB)

Tuomas A. Peltonen

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: January 09, 2019

Abstract

We demonstrate that financial cycles (identified as common fluctuations in credit and asset prices, proxying balance-sheet leverage) strongly differ across countries, e.g., in duration. This is contradictory to a similar duration assumption inherent in prevalent proxies of financial cycles, such as the Basel III credit-to-GDP gap guiding countercyclical capital buffers. Against this backdrop, we propose a methodology for constructing financial cycles relaxing the similar-duration assumption and observe an improved capacity in predicting financial crises. Specifically, we use credit and asset prices as inputs to our methodology and show that constructed financial cycles significantly outperform the credit-to-GDP gap in predicting financial crises.

Keywords: Macroprudential policy, Financial cycle, Spectral analysis

JEL Classification: E30, E40, C54

Suggested Citation

Schüler, Yves Stephan and Hiebert, Paul and Peltonen, Tuomas A., Coherent Financial Cycles for G-7 Countries: Why Extending Credit Can Be an Asset (January 09, 2019). Available at SSRN: https://ssrn.com/abstract=2539717 or http://dx.doi.org/10.2139/ssrn.2539717

Yves Stephan Schüler (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Paul Hiebert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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