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A unified approach for jointly estimating the business and financial cycle, and the role of financial factors

Tino Berger, Julia Richter and Benjamin Wong

No 415, University of Göttingen Working Papers in Economics from University of Goettingen, Department of Economics

Abstract: We jointly estimate the U.S. business and financial cycle through a unified empirical approach while simultaneously accounting for the role of financial factors. Our approach uses the Beveridge-Nelson decomposition within 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 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)
Date: 2021
New Economics Papers: this item is included in nep-fdg and nep-mac
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https://www.econstor.eu/bitstream/10419/232064/1/1752041453.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) Downloads
Working Paper: A Unified Approach for Jointly Estimating the Business and Financial Cycle, and the Role of Financial Factors (2021) Downloads
Working Paper: A unified approach for jointly estimating the business and financial cycle, and the role of financial factors (2021) Downloads
Working Paper: Financial factors and the business cycle (2020) Downloads
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