Title: Financial cycle facts across G-7 countries and detrending: Spuriously robust!
Authors: Yves Schueler - European Central Bank (Germany) [presenting]
Abstract: I find that applying the wrong method of detrending to financial variables - important for macroprudential policy making -, may lead to spurious cycles, ill informing researchers and policy makers about their characteristics. While properties of financial variables vary strongly across detrending methods, financial cycle facts are broadly robust; the latter being defined relative to similarly detrended business cycle indicators. Nonetheless, the frequency domain perspective suggests that the robustness is partially based on spurious cycles that bias inference, such as analyses of synchronisation of cycles across countries or, possibly, financial crises prediction. The risk of spurious cycles is especially large using the HP filter in combination with a high smoothing parameter, calling for caution in applying the recommended smoothing parameter of 400000 referenced in the Basel III regulations. At last, using a novel spectral measure I show that lower synchronisation of financial cycles across countries is due to opposing long term cycles of country pairs.