An Indicator of the Financial Cycle in the Czech Economy

This article describes a method for assessing the position of the Czech economy in the financial cycle. On the basis of selected variables tracking risks in the financial sector and the real economy, we construct an indicator aimed at signalling the emergence of future problems in timely fashion. The results show that the indicator is able to capture the individual phases of the financial cycle and predict the size of the banking sector’s future loan losses six quarters ahead. Assessing the current position of the Czech economy in the financial cycle is a necessary condition for proper macroprudential policy-making and especially for setting the countercyclical capital buffer.