Financial cycles in Europe: dynamics, synchronicity and implications for business cycles and macroeconomic imbalances

Abstract

Using dynamic factor models and state-space techniques we quantify financial cycles for twenty European countries over the period 1960Q1–2015Q4 capturing imbalances across credit, housing, bond and equity markets. The paper documents the existence of slow-moving and persistent financial cycles, as well as cross-country synchronicity patterns in Europe. Spillover analysis points at the significant role the global financial cycle and the regional European financial cycle play in shaping national financial market dynamics. Quarterly Bayesian panel VAR estimations suggest that financial cycles influence business cycles and public debt dynamics, with stronger shock transmission observed in the euro area and systemic European economies.