8 builds and extends on work done at the BIS. 9 It shows how credit and asset prices share cyclical similarities, captured in a synthetic financial cycle index that outperforms credit-to-GDP gap measures in predicting systemic banking crises, on a horizon of up to three years. They also demonstrate how the financial cycle is different from the business cycle. Based on this research, we conclude that financial variables (credit volumes and asset prices) in EU countries have historically exhibited higher average volatility than economic variables (volume of activity in goods and labour markets, as well as consumer prices). Financial cycles have also exhibited a higher duration than business cycles on average. Lastly, asymmetries appear to exist, whereby financial cycles tend to build up slowly and correct more abruptly. Taken together, these findings have at least two policy implications. First, they establish a rationale for differentiated financial and macroeconomic policies, and are thereby fundamental to the newly established macroprudential policy area. Policies targeting financial cycles, such as countercyclical macroprudential policies, can act as a powerful complement to policies targeting the business cycle, such as monetary policy. Policy trade-offs may emerge in the short-run, as the propensity for such cyclical divergence seems to be greatest at short frequencies. Second, the results present a strong case for a differentiated national application of macroprudential policies, amid a far from complete convergence of country financial cycles.
This latter aspect is particularly compelling in a currency union with shared monetary policy, where macroprudential policies represent an additional and potentially powerful element to cushion conditions specific to member states. This underpins several principles that should guide macroprudential policy that I would like to address in the remaining of my remarks. 5  Hartmann, P., K. Hubrich, M. Kremer and R.J. Tetlow (2015) “Melting down: systemic financial instability and the macroeconomy” mimeo, February. 6  Allen, L., T.G. Bali and Y. Tang (2012) “Does systemic risk in the financial sector predict future economic development?“ The Review of Financial Studies, vol. 25, No. 10, October, pp. 3000–3036. 7  Giglio, S., B.T. Kelly and S. Pruit (2015) “Systemic risk and the macroeconomy: an empirical evaluation”, NBER Working Paper No. 20963, February. 8  Hiebert, P., I. Jaccard, T.A. Peltonen and Y. Schüler (2016) “Characterising the financial cycle: a multivariate and time-varying approach”, ECB-IMF Conference on Macroprudential Policy Frankfurt, 26–27 April 2016. 9  Borio, C., M. Drehmann and K. Tsatsaronis (2012) “Charaterising the financial cycle: don’t lose sight of the medium term!”, BIS Working Paper No. 380, June. 2  BIS central bankers’ speeches  Principles of Macroprudential Policy The ultimate objective of macroprudential policy is to prevent and mitigate systemic risk, which includes strengthening the resilience of the financial system and smoothening the financial cycle, in order to preserve the effective provision of financial services to the real economy.