The Business Cycle and the Financial Cycle

There is a new IMF working paper on this topic – available here.

Summary: 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.

5 thoughts on “The Business Cycle and the Financial Cycle”

  1. Do the IMF feel that they have produced something new here? Or does everything in economics have to be ‘proved’ these days? From the summary, there is nothing that someone at the end of the 1930s couldn’t have told you.

    PS there’s another name for: “recoveries associated with rapid growth in credit and house prices tend [that] to be stronger” – it’s bubbles and I don’t mean the chimp…

  2. “These findings emphasize the importance of developments in credit and housing markets for the real economy.”

    Umm, excuse ignorance here, but isn’t that just correlation? i.e. stronger economy = more money in circulation = cheaper credit + economic migration = increase in housing demand.

    Has anyone ever tried to compare the business/financial cycles with real productivity levels?

  3. “There will be seven years of great plenty in all the land of Egypt. After that, there will be seven years of famine, and all the good years will be forgotten, because the famine will ruin the country. The time of plenty will be entirely forgotten, because the famine which follows will be so terrible.” -Genesis

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