Synchronization of the business and financial cycle in Poland

PurposeFirst, we explored the dynamic relationship between the economic and financial cycles under a unified endogenous framework. There is less literature on the relationship between the financial cycle and the economic cycle endogenously under a unified framework. Our research helps to fill the gap in this area. Second, there is no conclusive evidence on whether the monetary policy framework should take the financial cycle into account. Our findings provide a clear answer and a useful reference for the practice of monetary policy in other countries.Design/methodology/approachWe incorporate the financial cycle equation based on the traditional new Keynesian model to construct a new Keynesian four-equation model that includes financial factors and further explores the dynamic relationship between the economic cycle and the financial cycle under a unified endogenous framework. We choose the three-stage least squares (3SLS) method for the estimation of the model. Then we utilize a time-varying parameter vector autoregression (TVP-SV-VAR) model incorporating stochastic volatility to explore the mechanism of the dynamic association between the financial cycle and monetary policy in China.FindingsFirst, we explored the relationship between the economic cycle and the financial cycle. The results show that the financial cycle has a significant positive impact on the economic cycle, but the economic cycle has a limited effect on the financial cycle. Then, we examine the linkage mechanism between China’s economic cycle, financial cycle and monetary policy. The results show that the response of China’s monetary policy to economic cycle shocks and financial cycle shocks is more significant. Moreover, monetary policy is giving higher and higher weight to the financial cycle.Originality/valueFirst, we constructed a new Keynesian four-equation model incorporating financial factors to explore the dynamic relationship between the economic and financial cycles under a unified endogenous framework. There is less literature on the relationship between the financial cycle and the economic cycle endogenously under a unified framework. Our research helps to fill the gap in this area. Second, there is no conclusive evidence on whether the monetary policy framework should take the financial cycle into account. Our findings provide a clear answer and a useful reference for the practice of monetary policy in other countries.

This paper investigates whether business cycles cause financial cycles or vice versa. We also assess whether the US plays a leading role in causing the domestic business and financial cycles of other countries. The literature has established that business and financial cycles are linked through several channels such as credit constraints, the real effects of financial information and the reversal of overoptimistic expectations. Our analysis evaluates the direction of Granger causality using a novel approach based on the mixed-frequency vector autoregression model for the G7 countries. Our approach exploits the fact that real economic activity measured by industrial production is observed at a higher frequency than aggregate credit. We find strong evidence of bidirectional causality between the business and financial cycles, especially in recessions. Furthermore, the US is a global leader since the US business cycle significantly affects other countries’ business cycles, especially in terms of expansions.

Our study aims to bridge the gap between contemporary studies on financial cycles and the financial instability hypothesis in the form of a Minsky cycle (Minsky, 1963). Paper contribution range from explored causality links (financial cycles cause business cycles) to the empirical estimation of the Minsky moment. We use Braitung and Candelon (2006) Granger causality test and discrete threshold model (Hansen, 2005) to the link between financial and business cycles in the UK from 1270–2016. Financial and business cycles relation varies over time with contemporary financial cycles being longer to their historical versions. Financial cycles lead business cycles. Business cycles are an economy reaction to them and change in the Minsky moment. Minsky moment has a statistically significant impact on main growth determinants – population, export, technology. Policymakers should look for the Minsky moment when setting up a new economic policy to assure it will be an effective one.

A market economy assumes the circularity of economic development. Many scholars have speculated on the existing relationship between economic and financial cycles. The emergence of financial markets in the early 20th century gave impetus to the development of the theory of financial cycles which account for financial ups and downs similarly with economic cycles. One of the most impactful areas of research of current trends in financial cycles is the study of how these are influenced by contemporary financial market tools, as this will help determine whether the basic phases of financial cycles can be reconciled.
 This article aims at analyzing various aspects of the relationship and the interaction of financial markets with the financial cycles of the national economy in the context of the Russian Federation. We also give consideration to the behavior of the contemporary financial system’s chief players––large corporations, credit institutions, facilitating agencies, and state authorities acting as regulators of financial and economic cycles.

Purpose In recent years, with the gradual differentiation of economic and financial cycles, it has been increasingly difficult for monetary policies to remain balanced in stabilizing both economy and finance. Taking the period of 1999–2017 as a sample, the purpose of this paper is to find whether the synergy between the growth cycle and the price cycle is constantly improving in the economic cycle is more appropriate. Design/methodology/approach The key to stabilizing the economic cycle lies in the monetary policy and it should abandon the goal of boosting growth in a timely manner and turn into the goal of maintaining steady growth. At present, quantitative monetary policy is still more effective than price-oriented monetary policy in smoothing the economic cycle. Findings The impact of quantitative regulation on the financial cycle is more neutral, whereas price regulation will increase the volatility of price and financial cycles in the course of smoothing the growth cycle. In view of the continuous differentiation between the economic and financial cycles, it is realistic and reasonable to accelerate the establishment of a sound dual-pillar regulatory framework of “monetary policy and macro-prudential policy.” Originality/value The macro-prudential policy is specially used to smooth the financial cycle, so as to reduce the burden and increase the efficiency of the monetary policy on regulating economic cycle. Moreover, the transformation of monetary policy to price-oriented regulation must keep pace with the construction of the dual-pillar regulation framework and complement each other to prevent undesirable consequences in the financial sector. On the other hand, monetary policy still needs to rely on quantitative regulation in the future. The research in this paper also provides a new perspective for understanding the internal and external reform of China’s monetary policy in recent years.

The mechanisms governing the relationship of money, and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics. In this paper, we first document key empirical aspects of this relationship. We then ask how well three benchmark rational expectations macroeconomic models-a real business cycle model, a price model and a effect model-account for these central facts. While the models have diverse successses and failures, none can account for the fact that real and nom- inal interest rates are inverted leading indicators of real economic activity. That is, none of the models captures the post-war U.S. business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future. I. Introduction THE positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the U.S. economy. Indeed, the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the Commerce Department's Index of Leading Economic Indica- tors. While this pattern of cyclical comovement is widely agreed upon, its interpretation is not. Some macroeconomists view money as purely passive, with a positive response to varying levels of economic activity producing the positive correlation. Others view changes in the quantity of money as an important, perhaps dominant, source of economic fluctua- tions. Frequently, the real of monetary changes are suggested to arise from frictions in commodity, labor or financial markets. In economic theories that describe the influence of these frictions, the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level. The primary goal of this paper is to evaluate three models that explain the link between money, prices, interest rates and the business cycle. We do this in three steps. First, we docu- ment the cyclical behavior of these variables in the United States over the postwar period. Second, we construct three quantitative rational expectations models of macroeconomic activity: (i) a real business cycle model with endogenous money; (ii) a model of commodity market frictions with mon- etary non-neutralities arising from gradual adjustment of goods prices; and (iii) a model of financial market frictions with monetary non-neutralities arising from gradual adjust- ments of portfolios. Finally, we compare the models' predic- tion for the business cycle behavior of money, and interest rates with the data. In exploring the predictions of these models, we take the stock of money to be one of several exogenous variables in the system. All of our models are capable of generating a forecasting role for money relative to real economic activity, similar to that found in the U.S. data. In the real business model, monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock. In the models with sticky prices and liquidity effects (short-hand names for the models with frictions in the com- modity and financial markets), monetary changes have an additional direct positive effect on aggregate output. The outline of the paper is as follows. Section II describes the data and documents its business cycle characteristics. Section III outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis. Our main empirical results are pre- sented in section IV, and section V summarizes our results and concludes.

This paper assesses the role of financial variables in real economic fluctuations, in view of analysing the link between financial cycles and business cycles at the global level. A Global VAR modelling approach is used to first assess the contribution of credit and asset price variables to real economic activity in a number of countries and regions. The GVAR model is based on 38 countries estimated over 1987-2013. An analysis on a sample excluding the post-financial crisis period is also provided to check whether financial variables have gained importance in explaining business cycle fluctuations over the recent past. In a second step, financial shocks are identified through sign restrictions in order to illustrate how financial and business cycles could be related. Overall, the paper shows that the importance of credit and asset price variables in explaining real economic fluctuations is relatively large, but has not significantly increased since the global financial crisis. The international transmission of financial shocks on business cycle fluctuations also tends to be large and persistent.

The data used in this research are from the first quarter of 2001 to the third quarter of 2020 to analyze the relationship between the financial cycle and the business cycle in China. The research results are as follows: First, the cycling period of housing price cycles and equity price cycles are relatively short in comparison with the ratios of total credit to the private credit to GDP. Second, the research shows that the selected indicators faithfully manifest the medium-term cycle. Third, in terms of the financial cycle, because of the peak, there is concern that this could lead to a financial crisis. Fourth, the financial cycle and business cycle were synchronized before the global financial crisis of 2008. However recently they are at odds. The monetary policy and financial stability have always been the main research questions of researchers. Because of the several financial crises, their importance has become more prominent. In addition, since the Great Moderation, leading researchers at the Bank for International Settlements (BIS) have studied the relationship between the stability of the real economy and financial stability with the concepts of financial cycle and business cycle. They pay attention to the expansion and contraction of the real economy caused by the financial sector. For the real economy, it not only needs to deal with the impact of the financial sector, but to distinguish the internal factors of the business cycle and the financial cycle. The point is that the two cycles are not always in sync. In the contraction period of the business cycle, the financial cycle can be in the expansion period, and vice versa. Thus, monetary policy aimed at price stability is often at odds with macroprudential policy aimed at financial security. It is an important task to properly integrate monetary policy and macroprudential policy according to different conditions. According to the research results, the enlightenment is obtained as follows: First, the financial cycle is inevitable, and it refers to the expansion and contraction of credit according to the certain period of the economic cycle. If the financial cycle is excessively amplified, the credit and asset prices will have boom-bust. Therefore, in order to mitigate the fluctuation of the financial cycle, it is necessary to create a sound macroeconomic environment by shaking off excessively low interest rates and implementing targeted policies. Second, in the financial cycle, it is very important to monitor the asset price development so as to avoid excessive asset prices bubble. Third, as the information and financial technology developing rapidly, although the changes of financial structure are inevitable, the procyclicality of the financial system has greatly increased, and the duration and intensity of the financial cycle have also greatly increased. Therefore, the country should begin to find measures to decrease the procyclicality of financial cycle.

The recent financial crisis illustrated that more attention should be given to the dynamics of the financial cycle and the interactions with the business cycle. The central aim of the study is to assess the driving factors contributing to the correlations and contagion effects between business and financial cycles in selected EU states. For the empirical approach, we use frequency filtering methods and spillover analysis to track correlation and contagion. We measure both financial cycle correlation and spillover factors by looking at trade links, systemic risk episodes and bilateral financial claims. An important result of the paper is that financial cycle correlation is significantly influenced by business cycle correlation, but also by the overlap of financial stress episodes. With regard to the spillover effects between financial cycles, we find that they are strongly influenced by business cycle and financial stress spillovers, as well as by trade linkages and bilateral financial claims. Both in the case of the spillover regression model and in the case of the regression model on correlations, the most significant factors for the links between financial cycles are the business cycles and the financial stress indices. The policy implications for macroprudential authorities entail taking into account cross-border effects and spillovers when implementing instruments for taming the financial cycle.

The strategic choice of Moroccan banks to conquer the African market has accelerated since the mid-2000s. According to the Banking Commission of the West African Economic and Monetary Union (WAEMU), Moroccan banks concentrate 29.6% of the market share in the WAEMU region in 2015, and more than 30% of the share of global net income in the region. The article is devoted to the research of the role of Moroccan banks in the economic development in African countries. Can Moroccan banks affect real economic activity and act as catalysts for financial and economic development in African countries? To answer this question, we examine the co-movements between loans granted by Moroccan banks in African countries and real activity in those countries. Therefore, we use the synchronization index proposed by Hading and Pagan (2002). The cycles were obtained with a Hodrick-Prescott (HP) filter. The concordance index values, cross-correlation values were used to identify the characteristics of the relationships between the cyclical components. The study covers the period 2006-2015 and focuses on three Moroccan banking groups (Attijariwafabank, BMCE Bank of Africa and Banque Centrale Populaire BCP) set up in seven countries: Benin, Burkina Faso, Cote d'Ivoire, Mali, Senegal, Togo and Niger. The empirical results revealed that the financial (credits granted by Moroccan banks) and business (real activity) cycles are highly synchronized in WAEMU. The study concluded that the bank credits have a positive impact on real activity in WAEMU countries within the period examined.

Taking Intermediation Seriously Bruce D. Smith (bio) Many modern approaches to macroeconomics attach no significance to financial intermediation. This is true despite the fact that various measures of banking activity are strongly correlated both with long-run real economic activity and with what happens during business cycles. Of course, the failure to attach significance to the macroeconomic consequences of financial intermediation could be rationalized if it had been shown that these correlations arose in a context where intermediary activity changed primarily in response to (or, in other words, was "caused by") changes in real activity. However, this interpretation of the facts does not seem justified for a variety of reasons. For example, in a large literature on financial intermediation and long-run growth, Cameron (1967), Goldsmith (1969), King and Levine (1993a, 1993b), Atje and Jovanovic (1993), Demirguc-Kunt and Levine (1996), and Levine, Loayza, and Beck (2000) have demonstrated that measures of private intermediary lending are strongly positively correlated with real long-run growth (or with the long-run level of real activity). Indeed, King and Levine argue that measures of financial intermediary activity are the only variables that bear a robustly significant relationship to long-run growth experience. Interestingly, Gurley and Shaw (1955) had argued at a very early point that growth in real activity promoted growth in financial activity and conversely—and that both real growth and financial development were endogenously and jointly determined. This seems like a useful conceptual framework. But, perhaps even more interestingly, the only formal empirical tests, of which I am aware, that attempt to discuss whether real growth affects financial intermediation causally and conversely are by Levine, Loayza, and Beck (2000). They argue that financial development causes growth, but that there is no empirical causality in the opposite direction. With respect to business cycles, as a very young economist influenced by real business cycle theory, I once asked Robert Lucas what the evidence was that monetary factors were important for business cycles. He cited Friedman and [End Page 1319] Schwartz (1963).1 Interestingly, Friedman and Schwartz provide very strong evidence that intermediary activity played an enormous role in business cycles in the U.S. between 1867 and World War II. In particular, all but one of the recessions they examine during that period are associated either with a banking crisis, and the 1937 recession is associated with an increase in the reserve-deposit ratio that was strongly responded to by banks. For most of the episodes examined, the strong monetary aspect of the business cycle is a large increase in the currency-deposit ratio. Lucas' argument seems to imply that this should be taken as an important aspect of at least dramatic business cycle episodes. And yet, Lucas and many others have never done this. The purpose of this paper is to discuss some frameworks for thinking seriously about how financial intermediation affects growth and about how banking crises affect major business cycle phenomena. As will be demonstrated, when this is done some fairly embarrassing results that arise in other macroeconomic contexts that ignore banking are easily overturned. One is that most monetary growth models tend to deliver either a Mundell-Tobin effect in which permanently higher inflation promotes long-run real activity, or a superneutrality result in which higher inflation does not affect real activity or real rates of return.2 In fact, there is strong evidence that— at least at high enough rates of inflation—inflation is significantly negatively correlated with long-run real activity.3 Another is the Friedman rule. In many contexts the Friedman rule (maintaining a zero nominal rate of interest) emerges as optimal.4 And yet, the major observed episodes of zero or nearly zero nominal rates of interest have occurred in places like the U.S. during the Great Depression or in Japan recently. No one regards allocations arising during these experiences as approximately optimal. As will be seen, when intermediation is analyzed seriously, the Friedman rule generally will not be optimal and the Mundell-Tobin effect or the superneutrality of money will not generally emerge. Of course, in order to make intermediation matter, it is necessary to consider environments in which the Modigliani-Miller theorem...

In this paper we study the relationship between business and financial cycles in Romania, highlighting their distinct characteristics and interactions. The global financial crisis highlighted the role of financial factors in shaping macroeconomic dynamics, especially in developing countries which are more vulnerable to foreign credit reversals. While the business cycle is well-defined, financial cycles are less “standardized” because of their longer duration and greater amplitude. Using quarterly data from 2005 to 2024, this study applies turning-point analysis, band-pass filtering, and finance-neutral output-gap estimation to highlight the key traits of Romania’s business and financial cycles. The results show these cycles rarely align, though GDP and real house prices move together more closely than credit measures. Real credit and property prices prove to shape the output gap significantly: booms in credit and housing push standard methods to overstate potential output, while financial contractions deepen downturns beyond what trend filters suggest. These insights underscore the value of weaving financial-cycle signals into macroeconomic analysis and help illuminate the unique dynamics of emerging economies.

We develop a multivariate unobserved components model to extract business cycle and financial cycle indicators from a panel of economic and financial time series of four large developed economies. Our model is flexible and allows for the inclusion of cycle components in different selections of economic variables with different scales and with possible phase shifts. We find clear evidence of the presence of a financial cycle with a length that is approximately twice the length of a regular business cycle. Moreover, cyclical movements in credit related variables largely depend on the financial cycle, and only marginally on the business cycle. Property prices appear to have their own idiosyncratic dynamics and do not substantially load on business or financial cycle components. Systemic surveillance policies should therefore account for the different dynamic components in typical macro financial variables.

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.

Financial cycle and business cycle: An empirical analysis based on the data from the U.S