Financial Cycles in Euro Area Economies: A Cross‐Country Perspective Using Wavelet Analysis*

Abstract

We study the cross-country dimension of financial cycles for six euro area countries using wavelet analysis. Estimated wavelet cohesions show that cycles in equity prices and interest rates display stronger synchronization across countries than real output cycles, whereas credit variables and house prices show lower cross-country synchronization. We propose a wavelet-based extension to the spectral envelope that is similar to a frequency-based time-varying principal component analysis. The country loadings show that, contrary to all other variables, cycles in loans to households and house prices in Germany and the Netherlands are negatively or less strongly correlated with the common cycles.JEL Classification numbers: C32, C38, E44, F36. *This paper represents the authors' personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank or of the Eurosystem. This paper is a substantially revised version of our work on the ECB report Real and financial cycles in EU countries: stylised facts and modelling implications . We are indebted to Davor Kunovac, Gerhard Rünstler and Bruno de Backer for helpful comments and discussions. Parts of this paper have been circulated as a Bundesbank Discussion Paper written with Davor Kunovac, see Kunovac, Mandler and Scharnagl (2018).1 For example, Basel III regulations link counter-cyclical capital buffers to a financial cycle proxy, the deviation of the credit-to-GDP ratio from its long-run trend (e.g. Drehmann and Tsatsaronis, 2014).

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