Indonesia's Financial Cycle

An understanding of the financial cycle is of vital importance in the formulation of macroprudential policy. The aim of this study is to construct the financial cycle based in the esearch of Drehmann et al. (2012) using the frequency-based filter and turning-point methods. This research produces two versions of Indonesia's financial Cycle (ICF), amely IFC-narrow credit and ICF-broad credit, in view of the importance of observing credit from both definitions. Based on the inter-variable co-movements, both ICF are compiled using credit and debt/GDP ratio. The results of teh research show that the financial cycle comprises two business cycles, with an average financial cycle lasting 9 to 10 years. The ICF can be early warning system for a crisis/pressure in the financial system, weherby IFC-narrow credit provides information at an earlier time than ICF-broad credit. Besides that, the amplitude in the 1997/1998 Asian Financial Crisis War greater than that in the 2008/2009 global financial crisis. This shows that more prudent policy implementation can mitigate the impact of the crisis/pressure on the financial system.