Credit Cycles and Business Cycles in Germany: A Comovement Analysis

Abstract

This paper investigates stylized facts of the cyclical nature of four German loan aggregates and of their comovement with GDP growth in the period from 1971-2011. According to the estimates, credit growth is characterized by strong cycles at low frequencies and rather weak cyclicality at higher frequencies. For loans to non-financial corporations strong cycles with a periodicity of 5-10 years are identified and a strong comovement with GDP at a cycle length of about 6 years is estimated. Furthermore, these loans lag GDP significantly by two to three quarters. In contrast, for loans to the private sector, loans to private households and housing loans no significant lead/lag relationship against GDP can be identified. The empirical evidence presented in the paper illustrates the financial instability hypothesis of the endogenous theory on credit cycles.

Keywords: business cycles, credit cycles, comovement, time domain, frequency domain

JEL Classification: C14, E32, E51