On the Direction of Causality between Business and Financial Cycles

This paper investigates whether business cycles cause financial cycles or vice versa. We also assess whether the US plays a leading role in causing the domestic business and financial cycles of other countries. The literature has established that business and financial cycles are linked through seve...

Full description

Saved in:
Bibliographic Details
Published inJournal of risk and financial management Vol. 16; no. 10; p. 430
Main Authors Tsiakas, Ilias, Zhang, Haibin
Format Journal Article
LanguageEnglish
Published Basel MDPI AG 01.10.2023
Subjects
Analysis
Business cycles
Causality
Economic crisis
Equity
GDP
Gross Domestic Product
Housing prices
Industrial production
Industrialized nations
International finance
Leadership
Literature reviews
Recessions
Regression analysis
Stochastic models
Time series
Canada
United Kingdom
France
Japan
Germany
United Kingdom > UK
United States > US
Italy
Online AccessGet full text

Cover

More Information
Summary:This paper investigates whether business cycles cause financial cycles or vice versa. We also assess whether the US plays a leading role in causing the domestic business and financial cycles of other countries. The literature has established that business and financial cycles are linked through several channels such as credit constraints, the real effects of financial information and the reversal of overoptimistic expectations. Our analysis evaluates the direction of Granger causality using a novel approach based on the mixed-frequency vector autoregression model for the G7 countries. Our approach exploits the fact that real economic activity measured by industrial production is observed at a higher frequency than aggregate credit. We find strong evidence of bidirectional causality between the business and financial cycles, especially in recessions. Furthermore, the US is a global leader since the US business cycle significantly affects other countries’ business cycles, especially in terms of expansions.
ISSN:1911-8074
1911-8066
1911-8074
DOI:10.3390/jrfm16100430