Conference Estimating and Interpreting Financial Cycles Opening by - - PowerPoint PPT Presentation

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Conference Estimating and Interpreting Financial Cycles Opening by - - PowerPoint PPT Presentation

Sep 09, 2022 221 likes •516 views

Conference Estimating and Interpreting Financial Cycles Opening by S J Koopman http://sjkoopman.net Department of Econometrics, Vrije Universiteit Amsterdam CREATES, Aarhus University De Nederlandsche Bank, 2 September 2016, Amsterdam W

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SLIDE 1

Conference ”Estimating and Interpreting Financial Cycles”

Opening by S J Koopman

http://sjkoopman.net Department of Econometrics, Vrije Universiteit Amsterdam CREATES, Aarhus University

De Nederlandsche Bank, 2 September 2016, Amsterdam

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SLIDE 2

W E L C O M E to DNB in Amsterdam

Many thanks to the organizers:

  • Gabriele Galati (Monetary Policy)
  • Peter van Els (Econometrics and Modelling)
  • Jasper de Winter (Econometrics and Modelling)
  • Irma Hindrayanto (Econometrics and Modelling)
  • Gita Gajapersad (Secretariat)
  • Claudia Trivieri (Travel and Conference Services)

2 / 26

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SLIDE 3

Workshop on Estimating and Interpreting Financial Cycles 2 September 2016 De Nederlandsche Bank Program

9:00-9:30 Registration with coffee/tea 9:30-10:00 Siem Jan Koopman (Vrije Universiteit Amsterdam) Challenges in estimating financial cycles SESSION 1 10:00-11:00 Mathias Drehmann (Bank for International Settlements) Methodologies to measure the financial cycle Discussant: Andreas Pick (De Nederlandsche Bank and Erasmus University Rotterdam) 11:00-11:30 Coffee 11:30-12:30 Mikael Juselius (Bank of Finland) Monetary policy and ultra-low interest rates: A financial cycle perspective Discussant: Marente Vlekke (Centraal Planbureau) 12:30-13:30 Buffet Lunch SESSION 2 13:30-14:30 Gerhard Rünstler (European Central Bank) Business, Housing and Credit Cycles Discussant: Gabriele Galati (De Nederlandsche Bank) 14:30-15:30 Irma Hindrayanto (De Nederlandsche Bank) Modeling the business and financial cycle in a multivariate structural time series model Discussant: Gabriel Pérez-Quirós (Bank of Spain) 15:30-16:00 Coffee 16:00-17:00 Oscar Jorda (Federal Reserve Bank of San Francisco) Macrofinancial History and the New Business Cycle Facts Discussant: Marco Terrones (International Monetary Fund) 17:00-17:30 Stijn Claessens (Federal Reserve Board) Using financial cycle estimates in policy 17:30-18:30 Farewell drinks 3 / 26

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SLIDE 4

Financial Cycle (FC)

The financial cycle captures systematic patterns in the financial system that can have important macroeconomic consequences, as formulated by Borio, Furfine and Lowe (2001). FC is typically characterized by co-movements of medium-term cycles in credit, the credit-to-GDP ratio and house prices while its peaks tend to coincide with onsets of financial crises, see Drehmann, Borio and Tsatsaronis (2012). Several methods are developed for measuring FCs including

  • variations of the Burns and Mitchell (1946) turning-point analysis,

see Claessens, Kose and Terrones (2011, 2012)

  • nonparametric bandpass filters, see Aikman et al. (2015) and

Sch¨ uler et al. (2015).

  • UC methods based on state space methods, see Hindrayanto et al.

(2016), R¨ unstler and Vlekke (2016), Koopman et al. (2016).

4 / 26

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SLIDE 5

Acronyms

  • BIS – Bank of International Settlement
  • DNB1 – De Nederlandsche Bank (Division FS)
  • DNB2 – De Nederlandsche Bank (Division Ebo)
  • BOE – Bank of England
  • BOJ – Bank of Japan
  • BOL – Bank of Lithuania
  • OF – Ortec Finance
  • BB – Bundesbank
  • BOF – Bank of Finland
  • FC – Financial cycle
  • RTC – Real Total Credit
  • CGR – Credit to GDP Ratio
  • RRP – Real Residential Property Prices
  • REP – Real Equity Prices

5 / 26

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SLIDE 6

Estimates of the U.S. Financial Cycle

BIS_FC

1980 2000

  • 0.1

0.0 0.1

BIS_FC DNB1_FC

1980 2000

  • 0.1

0.0

DNB1_FC DNB2_FC?

1980 2000

  • 0.25

0.00 0.25

DNB2_FC? BOE_FC

1980 2000 0.05 0.10

BOE_FC BOJ_FC

1980 2000

  • 0.1

0.0 0.1

BOJ_FC BOL_FC

1980 2000

  • 0.1

0.1

BOL_FC OF_FC

1980 2000 0.0 0.2

OF_FC BB_FC?

1980 2000 0.0 0.1

BB_FC? BOF_FC

1980 2000 0.0 0.2

BOF_FC

6 / 26

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SLIDE 7

Estimates of the U.S. Financial Cycle: all in one

BIS_FC BOE_FC OF_FC DNB1_FC BOJ_FC BB_FC? DNB2_FC? BOL_FC BOF_FC 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

  • 0.2
  • 0.1

0.0 0.1 0.2 0.3 BIS_FC BOE_FC OF_FC DNB1_FC BOJ_FC BB_FC? DNB2_FC? BOL_FC BOF_FC

7 / 26

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SLIDE 8

Correlation matrix

method: BP CF UC NP HP PCA NP Wav CVAR BIS DNB1 DNB2 BOE BOJ BOL OF BB BOF BIS 1.00 DNB1 0.70 1.00 DNB2 0.92 0.56 1.00 BOE 0.40 0.81 0.30 1.00 BOJ 0.65 0.90 0.48 0.83 1.00 BOL 0.06 0.41

  • 0.15

0.61 0.47 1.00 OF 0.91 0.43 0.92 0.14 0.40

  • 0.14

1.00 BB 0.06 0.33

  • 0.10

0.57 0.45 0.44

  • 0.17

1.00 BOF

  • 0.27
  • 0.64
  • 0.04
  • 0.58
  • 0.65
  • 0.73
  • 0.08
  • 0.26

1.00

8 / 26

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SLIDE 9

Principal Components

PC# Eigenvalues % variation % cumulative 1 4.687 52.08 52.08 2 2.587 28.74 80.83 3 0.8089 8.99 89.81 4 0.4091 4.55 94.36 5 0.2602 2.89 97.25 6 0.09800 1.09 98.34 7 0.09497 1.06 99.39 8 0.03320 0.37 99.76 9 0.02129 0.24 100.00

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SLIDE 10

Eigenvectors

PC1 PC2 PC3 PC4 BIS 0.37032

  • 0.34884

0.017974

  • 0.21917

DNB1 0.43254 0.025954

  • 0.020163

0.42316 DNB2 0.30043

  • 0.45222

0.084131

  • 0.063972

BOE 0.38104 0.23780 0.19841 0.30476 BOJ 0.43169 0.085877 0.074512 0.26785 BOL 0.23275 0.42527

  • 0.31832
  • 0.55359

OF 0.26683

  • 0.47238
  • 0.072259
  • 0.37049

BB 0.18427 0.34883 0.72755

  • 0.39822

BOF

  • 0.30764
  • 0.28904

0.55803 0.043308

10 / 26

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SLIDE 11

Estimates of the U.S. Financial Cycle: First 4 PCs

PC1

1970 1980 1990 2000 2010

  • 2.5

0.0 2.5 5.0

PC1 PC2

1970 1980 1990 2000 2010

  • 5.0
  • 2.5

0.0 2.5

PC2 PC3

1970 1980 1990 2000 2010

  • 1

1 2

PC3 PC4

1970 1980 1990 2000 2010

  • 1

1

PC4 11 / 26

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SLIDE 12

Estimates of the U.S. Financial Cycle: First PC

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

  • 4
  • 3
  • 2
  • 1

1 2 3 4 5

12 / 26

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SLIDE 13

Estimates of the U.S. Financial Cycle: First two PC

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

  • 4
  • 2

2 4

13 / 26

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SLIDE 14

Estimates of the U.S. Financial Cycle: First three PC

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

  • 4
  • 2

2 4 6

14 / 26

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SLIDE 15

Estimates of the U.S. Financial Cycle: cf

PPC123 BIS_FC 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

  • 0.10
  • 0.05

0.00 0.05 0.10 PPC123 BIS_FC

15 / 26

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SLIDE 16

Estimates of the U.S. Financial Cycle: cf

PPC123 DNB2_FC 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

  • 0.2
  • 0.1

0.0 0.1 0.2 0.3 PPC123 DNB2_FC

16 / 26

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SLIDE 17

Common dynamic factors

We can also decompose the nine FC estimates by four dynamic factors : FCi,t = aiψ1,t + biψ2,t + ciψ3,t + diψ4,t + ui,t, where ψj,t is a cyclical dynamic component and ui,t is an error, for i = 1, . . . , 9 and j = 1, . . . , 4. We have used the STAMP program to carry out the estimation.

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SLIDE 18

Goodness-of-fit

R2 BIS 0.99873 DNB1 0.85312 DNB2 0.99203 BOE 0.97467 BOJ 0.84678 BOL 0.59206 OF 0.99947 BB 0.45042 BOF 0.56713

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SLIDE 19

Prediction residuals

1980 2000

  • 2

2 1980 2000

  • 2

2 1980 2000

  • 2.5

0.0 2.5 5.0 1980 2000

  • 2

2 1980 2000

  • 2

2 1980 2000

  • 2.5

0.0 2.5 5.0 1980 2000 2 1980 2000 2 1980 2000 2

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SLIDE 20

Estimates of Financial Cycle for Netherlands

BIS_FC

1980 2000 0.0 0.1 0.2 0.3

BIS_FC DNB1_FC

1980 2000

  • 0.1

0.0 0.1

DNB1_FC DNB2_FC

1980 2000

  • 0.25

0.00 0.25 0.50

DNB2_FC BOE_FC

1980 2000 0.05 0.10

BOE_FC BOJ_FC

1980 2000

  • 0.1

0.0 0.1 0.2

BOJ_FC BOL_FC

1980 2000

  • 0.2

0.0 0.2

BOL_FC OF_FC

1980 2000

  • 0.1

0.0 0.1 0.2

OF_FC BB_FC

1980 2000 0.0 0.1

BB_FC BOF_FC

1980 2000

  • 0.25

0.00 0.25

BOF_FC

20 / 26

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SLIDE 21

Estimates of Financial Cycle for NL: all in one

BIS_FC BOE_FC OF_FC DNB1_FC BOJ_FC BB_FC DNB2_FC BOL_FC BOF_FC 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

  • 0.4
  • 0.3
  • 0.2
  • 0.1

0.0 0.1 0.2 0.3 BIS_FC BOE_FC OF_FC DNB1_FC BOJ_FC BB_FC DNB2_FC BOL_FC BOF_FC

21 / 26

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SLIDE 22

Correlation matrix – NL

method: BP CF UC NP HP PCA NP Wav CVAR BIS DNB1 DNB2 BOE BOJ BOL OF BB BOF BIS 1.00 DNB1 0.70 1.00 DNB2 0.76 0.66 1.00 BOE 0.33 0.50 0.07 1.00 BOJ 0.37 0.58 0.17 0.81 1.00 BOL

  • 0.03

0.31 0.10 0.45 0.47 1.00 OF 0.81 0.37 0.85

  • 0.10

0.04

  • 0.16

1.00 BB

  • 0.02

0.39 0.08 0.16 0.10 0.25

  • 0.20

1.00 BOF

  • 0.06
  • 0.49
  • 0.00
  • 0.75
  • 0.72
  • 0.66

0.28

  • 0.48

1.00

22 / 26

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SLIDE 23

Principal Components

PC# Eigenvalues % variation % cumulative PC1 3.844 42.71 42.71 PC2 2.742 30.47 73.18 PC3 1.064 11.82 85.00 PC4 0.6638 7.38 92.37 PC5 0.2272 2.52 94.90 PC6 0.1991 2.21 97.11 PC7 0.1423 1.58 98.69 PC8 0.1060 1.18 99.87 PC9 0.01170 0.13 100.00

23 / 26

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SLIDE 24

Estimates of Financial Cycle for NL: First 4 PCs

PC1

1970 1980 1990 2000 2010

  • 2.5

0.0 2.5

PC1 PC2

1970 1980 1990 2000 2010

  • 2

2

PC2 PC3

1970 1980 1990 2000 2010

  • 2
  • 1

1

PC3 PC4

1970 1980 1990 2000 2010

  • 2
  • 1

1 2 3

PC4 24 / 26

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SLIDE 25

Conclusions

  • Financial Cycle : it is an unobservable variable !!
  • Only noisy indicators associated with FC can be observed.
  • Problem and challenge is comparable to Business Cycle.
  • However, the definition of the FC is more diverse.
  • Indicators are more noisier and not necessarily typical Gaussian

variables.

  • Many challenges and more work required !!

25 / 26

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SLIDE 26

Conclusions

  • Financial Cycle : it is an unobservable variable !!
  • Only noisy indicators associated with FC can be observed.
  • Problem and challenge is comparable to Business Cycle.
  • However, the definition of the FC is more diverse.
  • Indicators are more noisier and not necessarily typical Gaussian

variables.

  • Many challenges and more work required !!

Let’s make some progress today !!

25 / 26

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SLIDE 27

Conference ”Estimating and Interpreting Financial Cycles”

Opening by S J Koopman

http://sjkoopman.net Department of Econometrics, Vrije Universiteit Amsterdam CREATES, Aarhus University

De Nederlandsche Bank, 2 September 2016, Amsterdam

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