Abstract
Abstract While the legitimacy of the concept of the financial cycle (as distinct from the business cycle) in research and economic policy after the experience of the global financial crisis raises no concerns, the methodology for its application has become a subject of discussion. The purpose of this article is to indicate which research methods dominate in identifying a financial cycle and which methodological traps accompany them. The low level of critical perspective on the methods used to identify cycles often results in conclusions that have no economic justification and may result in erroneous decisions in economic policy and central bank practice. The case study carried out in the article confirms that the key elements in identifying a financial cycle are part of a long-term series covering at least two lengths of the financial cycle. In addition, because the results may be sensitive to the type of filter used, it is important not to rely on a single variable but rather to build indexes that take into account a number of them (including those obtained using filtration methods).
Highlights
The global financial crisis has highlighted a gap in the analysis of financial stability, in particular the analysis of the reasons for the emergence of crises and the possibility of predicting them
The fundamental factor is the condition of the real economy, while for macroprudential policy it is the level of financial imbalances which plays a prominent role
Along with the development of macroprudential policy instruments, there emerged the concept of a financial cycle, which is a determinant, for example, of the countercyclical capital buffer
Summary
The global financial crisis has highlighted a gap in the analysis of financial stability, in particular the analysis of the reasons for the emergence of crises and the possibility of predicting them. Borio, 2012 or Aikman, Lehnert, Liang, & Modugano, 2016) Another area is the synchronization between the financial cycles of different countries, or the synchronization between the financial and business cycle (e.g., Cleassens, Kose, & Terrones, 2011 or Kurowski and Rogowicz, 2018). This type of approach makes it possible to assess the links between the real and the financial economies from both the internal (in each country) and external (between countries) perspectives. Based on the often-incorrect methods of financial cycle determination, some researchers have drawn 'hard' conclusions for macroprudential policy and links between the financial sphere and the real sphere of the economy. The last part of the paper contains a summary of the most important findings from the analysis
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