Financial cycles across G7 economies: A view from wavelet analysis

Abstract

We analyse the cross-country dimension of financial cycles by examining cyclical co-movements in credit, house prices, equity prices and interest rates across the G7 economies. We use wavelet-based statistics to assess at which frequencies cyclical fluctuations and their cross-country co-movements are important and how these change over time. We show that cycles in interest rates and equity prices are at least as synchronised as cycles in real GDP, while cycles in credit and house prices are less synchronised. Furthermore, we propose a measure of the importance of common cycles for developments in individual countries. It shows that common cycles across countries in equity prices and long-term interest rates account for a larger share of the volatility of these variables at the country level than is the case for common cycles in credit aggregates. The importance of common cycles for fluctuations at the country level is roughly similar for house price growth and long-term interest rates.