Approximating Botswana's financial cycle: Expanding the macroprudential toolkit

Abstract

This study estimates the financial cycle for Botswana using the Christiano–Fitzgerald band‐pass filter, unobserved components approach and a Markov switching dynamic factor model. Using real credit and equity prices, together with several macroeconomic variables from 2001Q1 to 2021Q4, we find that the domestic financial cycle generally captures movements along the business cycle, with peaks reflecting the cumulative build‐up of risks during the boom that ultimately burst, coinciding with periods of financial distress. These findings shed light on the implications of financial fluctuations on domestic financial stability, hence, inform effective calibration of macroprudential tools, while also providing traction for implementation of the recently approved macroprudential policy framework for Botswana.