Measuring financial cycles in a model-based analysis: Empirical evidence for the United States and the euro area

- Financial cycles are estimated with an unobserved components time series model.
- The credit-to-GDP ratio (or total credit) and house prices share similar medium-term cycles.
- Financial cycles are longer and have larger amplitudes compared to business cycles.
- The length and amplitude of financial cycles varies across countries and over time.

We adopt an unobserved components time series model to extract financial cycles for the United States and the five largest euro area countries over the period 1970-2014. We find that financial cycles can parsimoniously be estimated by house prices and total credit or the credit-to-GDP ratio. We show that these medium-term cycles are longer and have larger amplitudes than business cycles, and that their length and amplitude vary over time and across countries.