Creating Financial Cycles in China and Interaction with Business Cycles on the Chinese Economy

Abstract

ABSTRACTThis study creates a Chinese financial cycle index to examine the lead-and-lag relations between business and financial cycles. We examine the macroeconomic performance when these cycles are in boom, bust, and other combinations. We have four interesting results. First, financial cycles occur less frequently than business cycles. Second, the upturn phase of a financial cycle is significantly longer than the downturn phase. Third, gross domestic product growth rates are at their lowest when the two cycles are in troughs and the highest when they reach their peaks. We find similar results for employment, inflation, and consumption rates. Fourth, financial cycles lead business cycles but not vice versa. Hence, policymakers should consider the financial system before bailing out the real economy, which alone is insufficient for the recovery of the macro economy.