The impact of risk cycles on business cycles: a historical view

Jon Danielsson, Marcela Valenzuela and Ilknur Zer
Additional contact information
Ilknur Zer: https://www.federalreserve.gov/econres/ilknur-zer.htm

No 1358, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.

Keywords: Stock market volatility; Uncertainty; Monetary policy independence; Financial instability; Risk-taking; Global financial cycles (search for similar items in EconPapers)
JEL-codes: F30 F44 G15 G18 N10 N20 (search for similar items in EconPapers)
Date: 2022-09-09
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-his, nep-ifn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.federalreserve.gov/econres/ifdp/files/ifdp1358.pdf (application/pdf)

Related works:
Journal Article: The Impact of Risk Cycles on Business Cycles: A Historical View (2023)
Working Paper: The impact of risk cycles on business cycles: a historical view (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1358

DOI: 10.17016/IFDP.2022.1358

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().