Publications published in 2021
- 29 December 2021
- WORKING PAPER SERIES - No. 132Details
- Abstract
- This paper examines households’ self-insurance in financial markets when a rare personal disaster, such as disability or long-term unemployment, may occur during working years. Personal disaster risk alters lifetime ex-ante investment choices, even if most workers will not experience a disaster. Uncertainty about the size of human capital losses, which characterizes rare disasters, results in lower risk-taking at the beginning of working life, and is crucial in order to match the observed age profiles of US investors from 1992 to 2016.
- JEL Code
- D15 : Microeconomics→Household Behavior and Family Economics
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
- 29 December 2021
- WORKING PAPER SERIES - No. 131Details
- Abstract
- This paper studies the risk management of central counterparties (CCPs) using a granular transaction-level dataset. We test whether margining practices are sufficient relative to portfolio risk and whether CCPs reduce margin requirements in a ‟race-to-the-bottom.” We find that, for some CCPs, margin breaches are predictable ex ante, but the portfolios of more interconnected clearing members are associated with higher margin holdings. While margin requirements increased significantly around the onset of the Covid-19 pandemic, controlling for portfolio and macro-financial variables, margin breaches did not. Our results indicate that changes in margins should be analyzed alongside margin breaches.
- JEL Code
- G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 17 December 2021
- REPORTS
- 15 December 2021
- WORKING PAPER SERIES - No. 130Details
- Abstract
- This paper studies leverage regulation and monetary policy when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal leverage regulation responds to arbitrary changes in investors’ and creditors’ beliefs and relate our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors and creditors, calls for tighter leverage regulation. Monetary policy should be tightened (loosened) in response to either investors’ or creditors’ optimism (pessimism).
- JEL Code
- G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 15 December 2021
- WORKING PAPER SERIES - No. 129Details
- Abstract
- This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 13 December 2021
- REPORTS
- 9 December 2021
- RISK DASHBOARDAnnexes
- 9 December 2021
- RISK DASHBOARD
- 9 December 2021
- RISK DASHBOARD
- 1 December 2021
- WORKING PAPER SERIES - No. 128Details
- Abstract
- This paper explores the transmission of non-capital shocks through banking networks. We develop a methodology to construct non-capital (idiosyncratic) shocks, using labor productivity shocks to large firms. We document a change in the relationship between foreign idiosyncratic shocks and domestic economic growth between 1978 and 2000. Contemporaneous changes in banking integration drive this phenomenon as geographically diversified banks divert funds away from economies experiencing negative shocks towards other unaffected economies. Our GIV estimates suggest that a 1% increase in bank loan supply is associated with a 0.05-0.26 pp increase in economic growth. Lastly, this can potentially explain the Great Moderation.
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence
R11 : Urban, Rural, Regional, Real Estate, and Transportation Economics→General Regional Economics→Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
R12 : Urban, Rural, Regional, Real Estate, and Transportation Economics→General Regional Economics→Size and Spatial Distributions of Regional Economic Activity
- 1 December 2021
- ADVISORY SCIENTIFIC COMMITTEE REPORT - No. 11Details
- Abstract
- In this report we outline how a formulating normative measure of macroprudential policy stance requires a framework containing objectives, tools and transmission mechanisms. To complement the currently prevailing narrative approach, we apply lessons from the monetary policy to macroprudential policy. We begin with by proposing that the ultimate objective of macroprudential policy is to minimise the frequency and severity of economic losses arising from severe financial distress and then integrate the concept of growth-at-risk into the framework. Implementation of our framework for the evaluation of the macroprudential policy stance faces a series of challenges, including availability of the appropriate data, that policymakers generally have multiple objectives and tools, and the uncertain responses of economic agents to macroprudential policy actions.
- 1 December 2021
- REPORTS
- 1 October 2021
- WORKING PAPER SERIES - No. 127Details
- Abstract
- Regulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption-liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G15 : Financial Economics→General Financial Markets→International Financial Markets
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G20 : Financial Economics→Financial Institutions and Services→General
F30 : International Economics→International Finance→General
- 24 September 2021
- RISK DASHBOARDAnnexes
- 24 September 2021
- RISK DASHBOARD
- 24 September 2021
- RISK DASHBOARD
- 15 September 2021
- WORKING PAPER SERIES - No. 126Details
- Abstract
- Mutual fund risk-taking via active portfolio rebalancing varies both in the cross-section and over time. In this paper, I show that the same is true for funds’ off-balance sheet risk-taking, even after controlling for on-balance sheet activities. For this purpose, I propose a novel measure of synthetic leverage, which can be estimated based on publicly available information. In the empirical application, I show that German equity funds have increased their risk-taking via synthetic leverage from mid-2015 up until early 2019. In the cross-section, I find that synthetically leveraged funds tend to underperform and display higher levels of fragility.
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
- 15 September 2021
- WORKING PAPER SERIES - No. 125Details
- Abstract
- Using loan-level data covering almost all loans to households and businesses from banks in Italy over the past 20 years, we offer new empirical evidence that credit declines during a recession primarily because of the reduction in the net creation of borrowers. We then build on a flow approach to decompose the net creation of borrowers into gross flows across three statuses: (i) borrower, (ii) applicant and (iii) neither borrower nor applicant (i.e. inactive firms or households in the bank credit market). Along the macroeconomic dimension of these gross flows, we document four cyclical facts. First, fluctuations in the number of new borrowers (inflows) account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting from the credit market (outflows). Third, borrower inflows are highly procyclical and tend to lead the business cycle. Fourth, decreases in the probability of a match between borrower and lender during recessions are a leading explanation for the role of borrower inflows.
- JEL Code
- E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
- 8 September 2021
- REPORTS
- 1 September 2021
- OCCASIONAL PAPER SERIES - No. 19Details
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G20 : Financial Economics→Financial Institutions and Services→General
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 1 September 2021
- OCCASIONAL PAPER SERIES - No. 18Details
- JEL Code
- C81 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Microeconomic Data, Data Access
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 30 August 2021
- NBFI MONITOR REPORT
- 16 August 2021
- WORKING PAPER SERIES - No. 124Details
- Abstract
- In this paper we present a new approach to analyse the interconnectedness between a macro-level network and a local-level network. Our methodology is developed on the Diebold and Yilmaz connectedness measure and it considers the presence of entities within a global network which can influence other entities within their own local network but are not relevant enough to influence the entities which do not belong to the same local network. This methodology is then applied to the Maltese domestic investment funds sector and we find that a high-level correlation between the domestic funds can transmit higher spillovers to the local stock exchange index and to the government bond secondary market prices. Moreover, a high correlation among the Maltese domestic investment funds can increase their vulnerability to shocks stemming from financial indices, and therefore, investment funds may potentially become a shock transmission channel.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics
G10 : Financial Economics→General Financial Markets→General
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 2 August 2021
- WORKING PAPER SERIES - No. 123Details
- Abstract
- This paper describes a novel methodology of measuring risky and conservative mortgage credit using household survey data for 18 European Union countries and the United Kingdom. In addition, we construct time series for both types of credit and embed them into a global vector autoregressive (GVAR) model, so as to study how shocks to both variables affect domestic output and propagate across countries through cross-border banking exposures. The results show that a decrease in risky credit can have long-lasting positive effects on GDP, both in the originating country and its most exposed peers, while a fall in conservative credit is detrimental. In some geographies, negative shocks to both types of credit reduce output, a feature linked to the lower relevance of homeownership which implies that mortgage credit plays a less prominent role in the domestic economy.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G51 : Financial Economics
- 1 July 2021
- REPORTSAnnexes
- 1 July 2021
- REPORTS
- 1 July 2021
- ANNUAL REPORTEnglishOTHER LANGUAGES (22) +
- 1 July 2021
- RISK DASHBOARDAnnexes
- 1 July 2021
- RISK DASHBOARD
- 1 July 2021
- RISK DASHBOARD
- 1 July 2021
- RISK DASHBOARD
- 15 June 2021
- WORKING PAPER SERIES - No. 122Details
- Abstract
- The crisis management framework for banks in the European Union (EU) requires the resolution authorities to identify the existence of a public interest to resolve an ailing bank, rather than to open normal insolvency proceedings (NIPs). The Public Interest Assessment (PIA) determines whether resolution objectives, including the safeguard of financial stability, can be better preserved using resolution tools than NIPs .This paper provides a contribution to the ongoing discussion on the implementation of the PIA, by presenting an analytical framework to quantify the potential impact on the real economy stemming from a bank’s failure under NIPs through the interruption of the lending activity (“credit channel”). The framework is harmonized across the jurisdictions belonging to the Banking Union and aims to improve the quantitative leg of the PIA, to be coupled with qualitative elements. In a first step, we quantify the potential credit shortfall faced by firms and households due to the abrupt closure of a bank. In a second step, the impact of the credit shortfall on real outcomes is estimated via a FAVAR model and via a micro-econometric model. Reference values are provided to assess the relevance of the estimated outcomes. The illustrative results show that such a harmonized approach can be applied across the Banking Union and to banks of heterogeneous size. In case of mid-sized banks, this common analytical framework could reduce the uncertainty regarding the extent to which the failure of the institution could have a negative impact to the real economy if the lending activity is interrupted as possibly the case under NIPs.
- JEL Code
- E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 1 June 2021
- REPORTS
- 1 June 2021
- WORKING PAPER SERIES - No. 121Details
- Abstract
- Abstract We analyse micro data on Irish mortgages and distressed households’ balance sheets in the last decade to assess the debt resolution process in the Irish mortgage market in the lead up to the COVID-19 shock. We highlight the widespread engagement of Irish borrowers with debt resolution mechanisms during a decade in which one sixth of mortgage accounts were restructured by 2016. Lenders favoured short-term mortgage modifications at the beginning of the decade and three-quarters of performing mortgages with short-term modifications in 2011-2012 remained performing at end-2017. However, close to half of these cases involved a subsequent longer-term restructure, consistent with concerns that short-term modification alone is not sufficient to ensure mortgage sustainability. In other cases, an over-reliance on unsustainable short-term arrangements translated into longer-term arrears accumulation. Turning to the financial distress of households seeking a resolution to their arrears, we find an average income fall of roughly one third since mortgage origination and that one third had already reduced their non-housing expenditures to below the recommended minimum level used in the personal insolvency system. Finally, we show that larger cuts in repayment burdens and lower ex-post payment-to-income ratios are both highly predictive of successful long-term restructures.
- JEL Code
- F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements
F28 : International Economics→International Factor Movements and International Business
G51 : Financial Economics
- 1 June 2021
- WORKING PAPER SERIES - No. 120Details
- Abstract
- What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.
- JEL Code
- E4 : Macroeconomics and Monetary Economics→Money and Interest Rates
E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
G2 : Financial Economics→Financial Institutions and Services
- 10 May 2021
- WORKING PAPER SERIES - No. 119Details
- Abstract
- This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital flows receded significantly in the aftermath of the global financial crisis, portfolio flows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis “second phase of global liquidity” (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability.
- JEL Code
- F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
G15 : Financial Economics→General Financial Markets→International Financial Markets
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 10 May 2021
- WORKING PAPER SERIES - No. 118Details
- Abstract
- In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) – a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control – besides domestic macroeconomic quantities – for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.
- JEL Code
- C38 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Classification Methods, Cluster Analysis, Principal Components, Factor Models
E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination
F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 28 April 2021
- REPORTS
- 6 April 2021
- RISK DASHBOARDAnnexes
- 6 April 2021
- RISK DASHBOARD
- 6 April 2021
- AMENDMENT
- 6 April 2021
- RISK DASHBOARD
- 31 March 2021
- WORKING PAPER SERIES - No. 117Details
- Abstract
- We study the implications of information technology (IT) in banking for financial stability, using data on US banks’ IT equipment and the tech-background of their executives. We find that one standard deviation higher pre-crisis IT adoption led to 10% fewer non-performing loans during the global financial crisis. We present several pieces of evidence that indicate a direct role of IT adoption in strengthening bank resilience; these include instrumental variable estimates exploiting the historical location of technical schools. Loan-level analysis reveals that high-IT adoption banks originated mortgages with better performance and did not offload low-quality loans.
- JEL Code
- O3 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design
D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief
- 15 March 2021
- WORKING PAPER SERIES - No. 116Details
- Abstract
- We use unique institutional securities holdings data to examine the trading behaviour of delegated institutional capital and its impact on bond risk premia. We show that institutional fund managers trade strongly procyclically: they actively move into higher yielding, longer duration and lower rated securities as yields fall and spreads compress, and vice versa. Funds more exposed to negative yields increase their risk-taking more strongly, and this effect is particularly pronounced for those offering explicit minimum return guarantees. Institutional funds' investments have large and persistent price impact in both corporate and sovereign bond markets. We provide evidence that this procyclical behaviour is driven by career concerns among institutional fund managers.
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
- 15 March 2021
- WORKING PAPER SERIES - No. 115Details
- Abstract
- This paper is a first attempt to include credit derivatives in international macro-financial analysis. We document that gross credit derivatives holdings map to bilateral portfolio investment linkages. On a net basis, our results suggest an asymmetry between sectors and between net buyers and net sellers of CDSs. When a banking system is a net buyer of protection, the protection purchased is proportional to the debt securities held. Conversely, when a banking system is a net seller, the protection sold is proportional to the securities held. For investment funds, we find no aggregate relation between net CDSs and the debt securities held.
- JEL Code
- F34 : International Economics→International Finance→International Lending and Debt Problems
F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements
- 16 February 2021
- REPORTSAnnexes
- 16 February 2021
- REPORTS
- 1 February 2021
- WORKING PAPER SERIES - No. 114Details
- Abstract
- The Basel III regulation explicitly prescribes the use of Hodrick-Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, the filter has been found to suffer from large ex-post revisions, raising concerns on its fitness for policy use. To investigate this problem we study credit cycles in a panel of 26 countries between 1971 and 2018. We reach two conclusions. The bad news is that the limitations of the one-side HP filter are serious and pervasive. The good news is that they can be easily mitigated. The filtering errors are persistent and hence predictable. This can be exploited to construct real-time estimates of the cycle that are less subject to ex-post revisions, forecast financial crises more reliably, and stimulate the build-up of bank capital before a crisis.
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 21 January 2021
- ASC INSIGHT - No. 2