Estimating business and financial cycles in Slovenia

Lenarčič, Črt (2021): Estimating business and financial cycles in Slovenia.

Abstract

In this paper we utilize a multivariate STSM model in order to estimate trend and cyclical components on a set of business and financial economic variables for Slovenia. The results show that financial cycles are somewhat longer compared to business cycles. Comparing the standard deviations of financial and business cycles give inconclusive results on average, but excluding particular macroeconomic variables that are by definition more volatile, we see that also standard deviations of financial cycles tend to be larger. From the economic policy implications point of view the results might not come as a surprise, but are utterly important for additionally implementing financial stability goals alongside the monetary policy mandate, as financial cycles seem to be longer and deeper compared to business cycles.

• Item Type: MPRA Paper
• Language: English
• Keywords: Unobserved components models, financial cycles, housing cycles, business cycles, model-based filters
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Adrian, T., Estrella, A., & Shin, H.S. (2010). Monetary Cycles, Financial Cycles and the Business Cycle. Federal Reserve Bank of New York Staff Reports, No. 421.

Adrian, T., & Shin, H.S. (2011). Financial Intermediaries and Monetary Economics. In Friedman, B., & Woodford, M. (Eds.), Handbook of Monetary Economics, Vol. 3, (pages 601-650). New York Elsevier.

Aikman, D., Haldane, A., Nelson, B. (2015). Curbing the Credit Cycle. Economic Journal, 125(585), 1072-1109.

Alessi, L., & Detken, C. (2009). Real-time Early Warning Indicators for Costly Asset Price Boom/Bust Cycles: a Role for Global Liquidity. ECB Working Paper, No. 1039.

Bartoletto, S., Chiarini, B., Marzano, E., & Piselli, P. (2017). Business Cycles, Credit Cycles, and Bank Holdings of Sovereign Bonds: Historical Evidence for Italy 1861-2013. Banca d’Italia Economic History Working Papers, No. 43.

Basistha, A., & Startz, R. (2008). Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator–Common Cycle Approach. Review of Economics and Statistics, 90(4), 805-811.

Black, L.K. & Rosen, R. (2016). Monetary Policy, Loan Maturity and Credit Availability. International Journal of Central Banking, 12(1), 199-230.

Borio, C., & Lowe, P. (2002). Assessing the Risk of Banking Crises. BIS Quarterly Review, December, 43-54.

Borio, C., & Lowe, P. (2004). Securing Sustainable Price Stability. Should Credit Come Back from the Wilderness? BIS Working Papers, No. 157.

Borio, C. (2012). The Financial Cycle and Macroeconomics: What Have We Learnt? BIS Working Papers, No. 395.

Borio, C., Lombardi, J.M., & Zampolli, F. (2016). Fiscal Sustainability and the Financial Cycle. BIS Working Papers, No. 552.

Breitung, J. & Eickmeier, S. (2016). Analysing International Business and Financial Cycles Using Multi-level Factor Models. in Hillebrand, J. and Koopman, S.J. (eds.) Advances in Econometrics, Vol. 35. Emerald Insight.

Bruno, V. & Shin, H.S. (2015). Capital Flows and the Risk-taking Channel of Monetary Policy. Journal of Monetary Economics, 71(4), 119-132.

Bulligan, G., Burlon, L., Delle Monache, D., & Silvestrini, A. (2019). Real and Financial Cycles: Estimates Using Unobserved Component Models for the Italian Economy. Statistical Methods & Applications\normalfont, 28, 541-569.

Burlon, L., & D'Imperio, P. (2020). Reliable Real-Time Estimates of the Euro-Area Output Gap. Journal of Macroeconomics, 64, 103-191.

Cerutti, E., Claessens, S. and Laeven, L. (2015). The Use and Effectiveness of Macro-prudential Policies: New Evidence. IMF Working paper, No. 15/61.

Chen, X., Kontonikas, A., & Montagnoli, A. (2012). Asset Prices, Credit and the Business Cycle. Economics Letters, 117(3), 857-861.

Christiano, L., & Fitzgerald, T. (2003). The Band-Pass Filter. International Economic Review, 44(2), 435-465.

Claessens, S., Kose, M.A., & Terrones, M.E. (2012). How Do Business and Financial Cycles Interact? Journal of International Economics, 87(1), 178-190.

Comin D., & Gertler, M. (2006). Medium-term Business Cycles. American Economic Review, 96(3), 523-551.

Communale, M. (2015). Financial Cycle Measures for 41 Countries: A New Database. Bank of Lithuania Occasional Paper Series, No. 9/2015.

De Bonis, R., & Silvestrini, A. (2014). The Italian Financial Cycle: 1861-2011. Cliometrica, 8(3), 301-334.

de Winter, J., Koopman, S.J., Hindrayanto, I., Chouhan, A. (2017). Modeling the Business and Financial Cycle in a Multivariate Structural Time Series Model\normalfont. DNB Working Papers, No. 573.

Drehmann, M., Borio, C., & Tsatsaronis, K. (2012). Characterising the Financial Cycle: Don't Lose Sight of the Medium Term! BIS Working Papers, No. 380.

Drehmann, M., & Tsatsaronis, K. (2014). The Credit-to-GDP Gap and Countercyclical Capital Buffers: Questions and Answers. BIS Quarterly Review, March, 55-73.

Edge, R.M., & Meisenzahl, R.R. (2011). The Unreliability of Credit-to-GDP Ratio Gaps in Real Time: Implications for Countercyclical Capital Buffers. International Journal of Central Banking\normalfont, 7(4), 261-298.

English, W., Tsatsaronis, K., & Zoli, E. (2005). Assessing the Predictive Power of Measures of Financial Conditions for Macroeconomic Variables. BIS Working Paper, No. 22.

Gadanecz, B. & Jayaram, K. (2016). Macroprudential Policy Frameworks, Instruments and Indicators: a Review. in Irving Fisher Committee Bulletin No. 41: Combining Micro and Macro Statistical Data for Financial Stability Analysis. BIS.

Galati, G., Hindrayanto, I., Koopman, S.J., & Vlekke, M. (2016). Measuring Financial Cycles in a Model-Based Analysis: Empirical Evidence for the United States and the Euro Area. Economics Letters\normalfont, 145(C), 83-87.

Geanakoplos, J. (2009). The Leverage Cycle. In Acemoglu, D., Rogoff, R., & Woodford, M. (Eds.), NBER Macroeconomics Annual, Vol. 24. University of Chicago Press.

Gerdesmeier, D., Reimers, H.E., Roffia, B. (2010). Asset Price Misalignments and the Role of Money and Credit. International Finance, 13(3), 377-407.

Gertler, M., & Karadi, P. (2011). A Model of Unconventional Monetary Policy. Journal of Monetary Economics, 58(1), 17-34.

Giese, J., Andersen, H., Bush, O., Castro, C., Farag, M., & Kapadia, S. (2014). The Credit‐to‐GDP Gap and Complementary Indicators for Macro-prudential Policy: Evidence from the UK. International Journal of Finance & Economics, 19(1), 25-47.

Goodhart, C., & Hofmann, B. (2008). House Prices, Money, Credit, and the Macroeconomy. Oxford Review of Economic Policy, 24(1), 180-205.

Hanson, S.G., Kashyap, A.K., & Stein, J. (2011). A Macro-prudential Approach to Financial Regulation. Journal of Economic Perspectives, 25(1), 3-28.

Hartmann, P. (2015). Real Estate Markets and Macro-prudential Policy in Europe. Journal of Credit and Banking, 47(S1), 49-80.

Harvey, A. (1989). Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge University Press.

Harvey, A.C., & Koopman, S.J. (1997). Multivariate Structural Time Series Models. In Heij, C., Schumacher, H., & Hanzon, B. (Eds.), System Dynamics in Economic and Financial Models (pages 269-298). New York, Wiley.

Hatzius, J., Hooper, P., Mishkin, F., Schoenholtz, K. & Watson, M. (2010). Financial Conditions Indexes: a Fresh Look after the Financial Crisis. NBER Working Papers, No. 16150.

Huber, S.J. (2016). Housing Booms and Busts: Convergence and Divergence in OECD Countries. mimeo, 2016.

Hubrich, K., D'Agostino, A., Červená, M., Ciccarelli, M., Guarda, P., Haavio, M., Jeanfils, P., Mendicino, C., Ortega, E., Valderrama, M.T., and Valentinyiné Endrész, M. (2013). Financial Shocks and the Macroeconomy. ECB Occasional Paper, No 143.

Jordá, Ò., Schularick, M., & Taylor, A. (2015). Betting the House. Journal of International Economics, 96(S1), S2-S18.

Jordá, Ò., Schularick, M., & Taylor, A. (2016). The Great Mortgaging: Housing Finance, Crises, and Business Cycles. Economic Policy\normalfont, 31(85), 107-162.

Lenarčič, Č. (2019). Complementaries and Tensions between Monetary and Macroprudential Policies in an Estimated DSGE Model (Application to Slovenia). MPRA Paper 104486.

Lenarčič, Č., & Masten, I. (2020). Is There a Harrod-Balassa-Samuelson Effect? New Panel Data Evidence from 28 European Countries. MPRA Paper 100647.

Melolinna, M., & Tóth, M. (2018). Output Gaps, Inflation and Financial Cycles in the UK. Empirical Economics, 56(3), 1039-1070.

Mian, A., & Sufi, A. (2010). The Great Recession: Lessons from Microeconomic Data. American Economic Review: Papers and Proceedings, 100(2), 51-56.

Miranda-Agrippino, S. & Rey, H. (2015). World Asset Markets and the Global Financial Cycle. NBER Working Paper, No. 21722.

Murray, M. (2003). Cyclical Properties of Baxter-King Filtered Time Series. Review of Economics and Statistics, 85(2), 471-476.

Ng, T. (2011). The predictive Content of Financial Cycle Measures for Output Fluctuations. BIS Quarterly Review, June, 53-65.

Orphanides, A., & Van Norden, S. (2002). The Unreliability of Output Gap Estimates in Real-Time. Review of Economics and Statistics, 84(4), 569-583.

Rey, H. (2015). Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence. CEPR Discussion Papers 10591.

Rünstler, G. (2002). The Information Content of Real-Time Output Gap Estimates: An Application to the Euro Area. ECB Working Paper Series, No. 182.

Rünstler, G. (2004). Modelling Phase Shifts Among Stochastic Cycles. Econometrics Journal, 7(1), 232-248.

Rünstler, G., Balfoussia, H., Burlon, L., Buss, G., Comunale, M., De Backer, B., Dewachter, H., Guarda P., Haavio, M., Hindrayanto, I., Ivanov Iskrev, N., Jaccard, I., Kulikov, D., Kunovac, D., Lenarčič, Č., Lequien, M., Lozej, M., Mandler, M., Papageorgiou, D., Pedersen, J., Perez-Quiros, G., Rannenberg, A., Rots, E., Scharnagl, M., & Weiz, P. (2018). Real and Financial Cycles in EU Countries: Stylised Facts and Modelling Implications. ECB Occasional Paper Series, No. 205.

Rünstler, G., & Vlekke, M. (2018). Business, Housing, and Credit Cycles. Journal of Applied Econometrics, 33(2), 212-226.

Schularick, M., & Taylor, A. (2012). Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008. American Economic Review, 102(2), 1029-1061.

Schüler, Y.S., Hiebert, P.P., & Peltonen, T.A. (2015). Characterising the Financial Cycle: a Multivariate and Time-Varying Approach. ECB Working Paper Series, No. 1846.

Schüler, Y.S., Hiebert, P.P., & Peltonen, T.A. (2017). Coherent Financial Cycles for G-7 Countries: Why Extending Credit Can Be an Asset. ESRB Working Paper Series, No. 43.

Strohsal, T., Proa\~no, C.R., & Wolters, J. (2015). How Do Financial Cycles Interact? Evidence from the US and the UK. SFB 649 Discussion Papers SFB649DP2015-024.

Strohsal, T., Proa\~no, C.R., & Wolters, J. (2019). Characterizing the Financial Cycle: Evidence from a Frequency Domain Analysis. Journal of Banking & Finance, 106, 568-591.

Trimbur, T. (2009). Improving Real-Time Estimates of the Output Gap. Federal Reserve Board Washington Finance and Economics Discussion Series, 2009-32.

Watson, M. (2007). How Accurate Are Real-Time Estimates of Output Trends and Gaps. Federal Reserve Bank of Richmond Economic Quarterly, 93(2), 143-161.