The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles
Claudio Borio recently quipped that “macroeconomics without the financial cycle is like Hamlet without the Prince” (Borio, 2014, p. 183). We rise to his call to arms and tackle the Prince’s existential question head-on. Our findings suggest that there exists a well-defined financial cycle in Iceland...
Main Authors: | , , , |
---|---|
Format: | Report |
Language: | unknown |
Subjects: | |
Online Access: | http://cb.is/library/Skraarsafn---EN/Working-Papers/WP_72.pdf |
id |
ftrepec:oai:RePEc:ice:wpaper:wp72 |
---|---|
record_format |
openpolar |
spelling |
ftrepec:oai:RePEc:ice:wpaper:wp72 2024-04-14T08:13:34+00:00 The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles Bjarni G. Einarsson Kristófer Gunnlaugsson Thorvardur Tjörvi Ólafsson Thórarinn G. Pétursson http://cb.is/library/Skraarsafn---EN/Working-Papers/WP_72.pdf unknown http://cb.is/library/Skraarsafn---EN/Working-Papers/WP_72.pdf preprint ftrepec 2024-03-19T10:33:47Z Claudio Borio recently quipped that “macroeconomics without the financial cycle is like Hamlet without the Prince” (Borio, 2014, p. 183). We rise to his call to arms and tackle the Prince’s existential question head-on. Our findings suggest that there exists a well-defined financial cycle in Iceland that has gradually become more prominent as the financial deepening and sophistication of the economy has increased. Using a dataset spanning more than a century, including data on credit, house prices, and bank balance sheet size and composition, we find that the aggregate financial cycle is much longer than the typical business cycle, with a median duration of sixteen years. We find that there is a large difference in economic performance over different phases of the financial cycle, suggesting that it has played a prominent role in the country’s macroeconomic development. In fact, we find that almost all of the peaks in the financial cycle coincide with some type of a financial crisis and that cyclical expansions provide a robust early-warning signal for subsequent crises. We find strikingly strong ties between the Icelandic financial cycle and its global counterpart (proxied by the US financial cycle), with almost all of the cyclical peaks in the Icelandic financial cycle occurring close to peaks in the global cycle. Our findings suggest that understanding economic fluctuations in Iceland is hard without understanding the financial cycle and that we ignore the financial cycle at our peril. We conclude with a first attempt at exploring some of the policy questions that our findings raise. Report Iceland RePEc (Research Papers in Economics) |
institution |
Open Polar |
collection |
RePEc (Research Papers in Economics) |
op_collection_id |
ftrepec |
language |
unknown |
description |
Claudio Borio recently quipped that “macroeconomics without the financial cycle is like Hamlet without the Prince” (Borio, 2014, p. 183). We rise to his call to arms and tackle the Prince’s existential question head-on. Our findings suggest that there exists a well-defined financial cycle in Iceland that has gradually become more prominent as the financial deepening and sophistication of the economy has increased. Using a dataset spanning more than a century, including data on credit, house prices, and bank balance sheet size and composition, we find that the aggregate financial cycle is much longer than the typical business cycle, with a median duration of sixteen years. We find that there is a large difference in economic performance over different phases of the financial cycle, suggesting that it has played a prominent role in the country’s macroeconomic development. In fact, we find that almost all of the peaks in the financial cycle coincide with some type of a financial crisis and that cyclical expansions provide a robust early-warning signal for subsequent crises. We find strikingly strong ties between the Icelandic financial cycle and its global counterpart (proxied by the US financial cycle), with almost all of the cyclical peaks in the Icelandic financial cycle occurring close to peaks in the global cycle. Our findings suggest that understanding economic fluctuations in Iceland is hard without understanding the financial cycle and that we ignore the financial cycle at our peril. We conclude with a first attempt at exploring some of the policy questions that our findings raise. |
format |
Report |
author |
Bjarni G. Einarsson Kristófer Gunnlaugsson Thorvardur Tjörvi Ólafsson Thórarinn G. Pétursson |
spellingShingle |
Bjarni G. Einarsson Kristófer Gunnlaugsson Thorvardur Tjörvi Ólafsson Thórarinn G. Pétursson The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles |
author_facet |
Bjarni G. Einarsson Kristófer Gunnlaugsson Thorvardur Tjörvi Ólafsson Thórarinn G. Pétursson |
author_sort |
Bjarni G. Einarsson |
title |
The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles |
title_short |
The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles |
title_full |
The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles |
title_fullStr |
The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles |
title_full_unstemmed |
The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles |
title_sort |
long history of financial boom-bust cycles in iceland - part ii: financial cycles |
url |
http://cb.is/library/Skraarsafn---EN/Working-Papers/WP_72.pdf |
genre |
Iceland |
genre_facet |
Iceland |
op_relation |
http://cb.is/library/Skraarsafn---EN/Working-Papers/WP_72.pdf |
_version_ |
1796311571820969984 |