Dynamical Interaction between Financial and Business Cycles

49 Pages Posted: 18 Oct 2017

See all articles by Monica Billio

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia

Anna Petronevich

Ca Foscari University of Venice, Department of Economics, Students

Date Written: October 15, 2017

Abstract

We adopt the Dynamical Influence model from computer science and transform it to study the interaction between business and financial cycles. For this purpose, we merge it with Markov-Switching Dynamic Factor Model (MS-DFM) which is frequently used in economic cycle analysis. The model suggested in this paper, the Dynamical Influence Markov-Switching Dynamic Factor Model (DI-MS-FM), allows to reveal the pattern of interaction between business and financial cycles in addition to their individual characteristics. More specifically, this model allows to describe quantitatively the existing regimes of interaction in a given economy and to identify their timing, as well as to evaluate the effect of the government policy on the duration of each of the regimes. We are also able to determine the direction of causality between the two cycles for each of the regimes. The model estimated on the US data demonstrates reasonable results, identifying the periods of higher interaction between the cycles in the beginning of 1980s and during the Great Recession, while in-between the cycles evolve almost independently. The output of the model can be useful for policymakers since it provides a timely estimate of the current interaction regime, which allows to adjust the timing and the composition of the policy mix.

Keywords: Business Cycle, Financial Cycle, Granger causality, Regime-switching models, Dynamic Factor Models, Dynamical interaction

JEL Classification: C32, C34, C38, E32

Suggested Citation

Billio, Monica and Petronevich, Anna, Dynamical Interaction between Financial and Business Cycles (October 15, 2017). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 24/WP/2014 , Available at SSRN: https://ssrn.com/abstract=3054438 or http://dx.doi.org/10.2139/ssrn.3054438

Monica Billio (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Anna Petronevich

Ca Foscari University of Venice, Department of Economics, Students ( email )

Venice
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
71
Abstract Views
529
rank
387,600
PlumX Metrics