DP8396 How Do Business and Financial Cycles Interact?

Author(s): Stijn Claessens, Ayhan Kose, Marco E Terrones
Publication Date: May 2011
Keyword(s): asset busts, booms, credit crunches, financial crises, recessions, recoveries
JEL(s): E32, E44, E51, F42
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8396

This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.