In the Quest of Measuring the Financial Cycle

Miroslav Plašil, Tomas Konecny, Jakub Seidler and Petr Hlaváč

Abstract: The recent financial crisis has demonstrated the importance of the linkages between the financial sector and the real economy. This paper sets out to develop two complementary methods for assessing the position of the economy in the financial cycle in order to identify emerging imbalances in timely manner. First, we construct a composite indicator using variables representing risk perceptions in the financial sector and calibrate this indicator to capture the credit losses the Czech banking sector experienced during the recent crisis. Second, we focus on the transitions of loans from one risk category to another, which allows us to capture the financial cycle from the perspective of the debt-paying ability of non-financial corporations. Both financial cycle measures can be used by policy makers for a wide range of policy decisions, including that on the setting of the countercyclical capital buffer.

Keywords: Bayesian model averaging; countercyclical capital buffer; credit risk; factor model; financial cycle (search for similar items in EconPapers)
JEL-codes: C11 E32 E37 E58 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-ger, nep-mac and nep-tra
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Citations: View citations in EconPapers (6)

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