Researcher: By Kabo Phage, University of the Witwatersrand, Johannesburg
Supervisor: Prof. Gregory Farrell, University of the Witwatersrand, Johannesburg
Financial cycles capture the evolution of risks to financial stability, and it follows that they are important for macro prudential policymakers. The robust measurement thereof can aid in formulating and implementing policy. This report adds some new evidence to scarce South African literature by focusing on measuring the financial cycle using Continuous Wavelet Transform techniques, which can decompose a time series into statistically significant frequency ranges used to identify cyclical behaviour. The results show that the South African financial cycle is well defined when identified by the co movements of medium-term cycles in credit and house prices whereas equity prices tend to be less informative. Furthermore, the financial cycle is longer in duration than the traditional business cycle and so policymakers should focus monitoring on the medium term for the sake of identifying the buildup of risk.
