Business Cycles, Credit Cycles, and Bank Holdings of Sovereign Bonds: Historical Evidence for Italy 1861-2013

Abstract

We propose a joint dating of Italian business and credit cycles on a historical basis by applying a local turning-point dating algorithm to the level of the variables. Along with short cycles corresponding to traditional business cycle fluctuations, we also investigate medium cycles, because there is evidence that financial booms and busts are longer and more persistent than business cycles. After comparing our cycles with the prominent qualitative features of the Italian economy, we carry out some statistical tests for comovement between credit and business cycles and find evidence that credit and business cycles are poorly synchronized, especially in the medium term. Nonetheless, we demonstrate that only for medium-term frequencies the coincidence of financial downturns and economic recessions significantly increases output losses. We do not find evidence that the credit cycle leads the business cycle, both in medium and short-term fluctuations. On the contrary, in the short cycle, we find some evidence that the business cycle leads the credit cycle. Finally, credit and business cycle comovement increases when credit embodies public bonds held by banks, i.e., bank financing to the public sector.

Keywords: business fluctuations, financial cycle, bank credit, medium-term fluctuations

JEL Classification: E32, E44, N13, N14