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

Jon Danielsson (), Marcela Valenzuela and Ilknur Zer
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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
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1358

DOI: 10.17016/IFDP.2022.1358

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