Abstract
We introduce a model-based rather than a pure filtering approach to estimate the financial cycle from a panel of economic and financial time series for four large developed economies. The possible existence and dynamics of a financial cycle have gained momentum following the 2008 financial crisis and the subsequent European sovereign debt crisis. Cyclical fluctuations in macrofinancial variables appear to be not only caused by business cycle fluctuations but also by other secular swings in financial aggregates. It is widely established that such “financial cycles” have a typical length of between 10 and 30 years, which is substantially longer than a typical business cycle. Therefore, estimating the dynamics of such cycles is an important step in surveilling systemic stability.
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