The Impact of Risk Cycles on Business Cycles: A Historical View

Jon Danielsson, Marcela Valenzuela and Ilknur Zer

The Review of Financial Studies, 2023, vol. 36, issue 7, 2922-2961

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 about 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.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

JEL-codes: F30 F44 G15 G18 N10 N20 (search for similar items in EconPapers)
Date: 2023
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Working Paper: 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 (2022)
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