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The Financial Cycle Indexes for Early Warning Exercise

April 2011
Koichiro Kamada*1
Kentaro Nasu*2

Abstract

This paper introduces financial cycle indexes and uses them in an early warning exercise. The indexes are based on the traditional theory of business cycles. Juglar cycles are deduced from a number of financial indicators, categorized as leading and lagging indicators, and aggregated into leading and lagging indexes. We constructed Japanese financial cycle indexes and found that they warn of the current global financial crisis about a year in advance. However, the result should be interpreted with caution, since the indexes fail to take into consideration the uncertainty surrounding real-time problems and the potential delays that may be caused by policy judgment. As a solution, we propose a scheme to forecast financial cycle indexes. According to the test results based on the Japanese data, our scheme gives advance warning of the ongoing global financial crisis.

We would like to thank the staff of the Bank of Japan for their helpful comments. The opinions expressed here, as well as any remaining errors, are those of the authors and should not be ascribed to the Bank of Japan or the Financial System and Bank Examination Department.

  • *1   Financial System and Bank Examination Department
    E-mail : kouichirou.kamada@boj.or.jp
  • *2   Financial System and Bank Examination Department
    E-mail : kentarou.nasu@boj.or.jp

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