Characterizing financial cycles: Are emerging markets different?

Characterizing financial cycles: Are emerging markets different?

A feature of the academic literature on financial cycles relates to the fact that it almost exclusively focuses on selected advanced economies, the findings of which may not necessarily hold for emerging economies. Global capital flow developments and monetary policies in advanced economies mean that financial cycle dynamics may differ substantially in emerging economies, not only in terms of turning points but also with regard to which asset market cycle best characterizes the financial cycle. Early work on financial cycles can be traced back to Kindleberger (1978) and Minsky (1986), who examined the role of credit booms leading to crisis events. Prior to the global financial crisis, direct work on financial cycles was not prevalent, with many analyses examining the effect of asset prices and credit aggregates on economic activity (e.g., Detken and Smets 2004; Goodhart and Hofmann 2008; Schularick and Taylor 2012). After the crisis, more direct analysis on financial cycles was undertaken. Drehmann, Borio, and Tsatsaronis (2012) showed that financial cycle peaks are closely associated with financial crises. Moreover, they found that credit aggregates and property prices played a strong role in characterizing the financial cycle in advanced economies.

Recent ADBI research (Beirne 2019) addresses the gap in the literature in three main ways. First, the study attempts to evaluate different measures of the financial cycle (credit, property and equity, i.e., the core asset markets for financial intermediation) for a large set of 38 advanced and emerging economies and identify which measures may warrant more importance for policy makers. Second, the research paper carries out a comprehensive assessment of financial and business cycles in advanced and emerging economies. Third, as the literature has tended to focus on measuring the cycle as opposed to understanding the drivers, the paper disentangles the domestic and global factors driving the financial cycle across …continue reading