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Global and domestic financial cycles: variations on a theme

Iñaki Aldasoro, Stefan Avdjiev (), Claudio Borio and Piti Disyatat

No 864, BIS Working Papers from Bank for International Settlements

Abstract: We compare and contrast two prominent notions of financial cycles: a domestic variant, which focuses on how financial conditions within individual economies lead to boom-bust cycles there; and a global variant, which highlights how global financial conditions affect individual economies. The two notions share a common analytical basis - the "procyclicality" of the financial system. Yet a number of distinguishing features stand out. These include differences in: (i) the underlying components - financial asset prices and capital flows for the global financial cycle (GFCy) versus credit and property prices for the domestic financial cycle (DFC); (ii) their empirical properties - the GFCy has a shorter duration and is primarily linked with traditional business cycles, while the DFC has a longer duration and is predominantly linked with medium-term business cycles; and (iii) the policy focus - "dilemma versus trilemma" for the GFCy, "lean versus clean" for the DFC. Despite these differences, the two cycles tend to come together around crises. Finally, we show that traditional GFCy measures mainly reflect developments in advanced economies and that a simple alternative measure is much more relevant for emerging market economies.

Keywords: global financial cycle; financial cycle; business cycle; capital flows (search for similar items in EconPapers)
JEL-codes: E32 E50 F30 F40 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2020-05
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-mac and nep-opm
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