Authors: Jungyeoun Lee(Bank of Korea), Yang Su Park(Bank of Korea)

Abstract

This report has extracted cyclical patterns from economic indicators befitting the concept and characteristics of a financial cycle, calculated a composite index for the financial cycle and looked into Korea’s financial cycle conditions.

The composite financial cycle index was calculated based on whether the cyclical components’ peaks are close to the times of financial unrest, and whether the indicators used for measuring the financial cycle are synchronized with each other. Based upon this we selected three indicators: the ratio of private credit to nominal GDP, real housing prices, and the share of non-core liabilities, standardized their cyclical components, and calculated the average. According to this Korea is found to have experienced five financial cycles since 1986. The average financial cycle length has been 23 quarters (5.8 years), longer than that of the real cycle (4.1 years). Korea has been in the expansionary phase of the fifth financial cycle since the fourth quarter of 2010. After having faltered for a bit due to the government’s measures against household debt, the cycle has sustained its expansionary phase since 2014. Meanwhile, the synchronization of Korea’s real economic and financial cycles had strengthened in the 2000s, but since the global financial crisis has now weakened.