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

44 Pages Posted: 5 Nov 2020

See all articles by Yves S. Schüler

Yves S. Schüler

affiliation not provided to SSRN

Paul Hiebert

European Central Bank (ECB)

Tuomas Peltonen

European Systemic Risk Board

Date Written: May, 2017

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.

Keywords: Financial cycle, Macroprudential policy, Spectral analysis

JEL Classification: C54, E32, E44, E58, G01

Suggested Citation

Schüler, Yves S. and Hiebert, Paul and Peltonen, Tuomas, Coherent Financial Cycles for G-7 Countries: Why Extending Credit Can Be an Asset (May, 2017). ESRB: Working Paper Series No. 2017/43, Available at SSRN: https://ssrn.com/abstract=3723390

Yves S. Schüler (Contact Author)

affiliation not provided to SSRN

No Address Available

Paul Hiebert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tuomas Peltonen

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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