Characterising the financial cycle in Luxembourg

DateOctober 2016
AuteurGaston GIORDANA and Sabbah GUEDDOUDJ

This paper characterises the financial cycle in Luxembourg using both the growth and classical cycle definitions. We implement both a frequency-based approach –using band-pass filters– to measure the growth cycle and a turning-point approach to capture the classical cycle. The financial cycle is characterized using varibales related to domestic credit and asset prices. We identify the dates of peaks/troughs for growth and classical cycles, describe the characteristics
of cycle phases and analyze the synchronisation between cycles for each macro-financial variable considered and the real activity. Additionally, we evaluate the synchronisation of credit and house prices across the neighbouring countries, based on the medium-term classical cycle. Finally, we introduce two novel tools to monitor the evolution of the financial cycle which are intended to contribute to informing macroprudential policy. The first tool is an optimal decision rule in the form of two warning thresholds signalling growth cycle phases related to a possible classical turning-point. The second tool is a measure of the probability of a turning-point in the classical cycle in each quarter after a peak in the growth cycle. The tools are built on the lead/lag relationships between peaks and troughs of growth and classical cycles. A composite index of the growth cycle is proposed as well.
Keywords : financial cycles, turning-points,  synchronisation, band-pass filter, survival data, Area
Under the Receiver Operating Characteristic Curve, Luxembourg.
JEL classification : E32, G01, G18.

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