Financial factors and the business cycle

Tino Berger, Julia Richter and Benjamin Wong

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We study how financial factors shape and interact with the U.S. business cycle through a unified empirical approach where we jointly estimate financial and business cycles as well as identify their underlying drivers using a medium-scale Bayesian Vector Autoregression. First, we show, both in reduced form and when we identify a structural financial shock, that variation in financial factors had a larger role in driving the output gap post-2000 and a more modest role pre-2000. Our results suggest that the financial sector did play a role in overheating the business cycle pre-Great Recession. Second, while we document a positive unconditional correlation between the credit cycle and the output gap, the correlation of the lagged credit cycle and the contemporaneous output gap turns negative when we condition on a financial shock. The sign-switch suggests that the nature of the underlying shocks may be important for understanding the relationship between the business and financial cycles.

Keywords: Business Cycle; Financial Cycle; Financial shocks (search for similar items in EconPapers)
JEL-codes: C18 E32 E51 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-05
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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https://cama.crawford.anu.edu.au/sites/default/fil ... er_richter_wong1.pdf (application/pdf)

Related works:
Journal Article: A unified approach for jointly estimating the business and financial cycle, and the role of financial factors (2022)
Working Paper: A Unified Approach for Jointly Estimating the Business and Financial Cycle, and the Role of Financial Factors (2021)
Working Paper: A unified approach for jointly estimating the business and financial cycle, and the role of financial factors (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2020-44

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