Financial Factors and the Business Cycle

33 Pages Posted: 5 May 2020

See all articles by Tino Berger

Tino Berger

University of Goettingen (Göttingen) - Department of Economics

Julia Richter

University of Goettingen (Göttingen)

Benjamin Wong

Monash University - Department of Econometrics & Business Statistics

Date Written: May 5, 2020

Abstract

We study how financial factors shape and interact with the U.S. business cycle through a unified empirical approach where we jointly estimate financial and business cycles as well as identify their underlying drivers using 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 in driving the output gap 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

JEL Classification: C18, E51, E32

Suggested Citation

Berger, Tino and Richter, Julia and Wong, Benjamin, Financial Factors and the Business Cycle (May 5, 2020). CAMA Working Paper No. 44/2020, Available at SSRN: https://ssrn.com/abstract=3593121 or http://dx.doi.org/10.2139/ssrn.3593121

Tino Berger

University of Goettingen (Göttingen) - Department of Economics ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

Julia Richter

University of Goettingen (Göttingen) ( email )

Wilhelmsplatz 1
Göttingen, 37073
Germany

Benjamin Wong (Contact Author)

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

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