Global and Domestic Financial Cycles: Variations on a Theme

32 Pages Posted: 15 May 2020

See all articles by Iñaki Aldasoro

Iñaki Aldasoro

Bank for International Settlements (BIS)

Stefan Avdjiev

Bank for International Settlements (BIS)

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Piti Disyatat

Bank for International Settlements (BIS)

Date Written: May 11, 2020

Abstract

We compare and contrast two prominent notions of financial cycles: a domestic variant, which focuses on how financial conditions within individual economies lead to boom-bust cycles there; and a global variant, which highlights how global financial conditions affect individual economies. The two notions share a common analytical basis - the "procyclicality" of the financial system. Yet a number of distinguishing features stand out. These include differences in: (i) the underlying components - financial asset prices and capital flows for the global financial cycle (GFCy) versus credit and property prices for the domestic financial cycle (DFC); (ii) their empirical properties - the GFCy has a shorter duration and is primarily linked with traditional business cycles, while the DFC has a longer duration and is predominantly linked with medium-term business cycles; and (iii) the policy focus - "dilemma versus trilemma" for the GFCy, "lean versus clean" for the DFC. Despite these differences, the two cycles tend to come together around crises. Finally, we show that traditional GFCy measures mainly reflect developments in advanced economies and that a simple alternative measure is much more relevant for emerging market economies.

Keywords: global financial cycle, financial cycle, business cycle, capital flows

JEL Classification: F30, F40, E32, E50

Suggested Citation

Aldasoro, Iñaki and Avdjiev, Stefan and Borio, Claudio E.V. and Disyatat, Piti, Global and Domestic Financial Cycles: Variations on a Theme (May 11, 2020). BIS Working Paper No. 864, Available at SSRN: https://ssrn.com/abstract=3599271

Iñaki Aldasoro (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Stefan Avdjiev

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Claudio E.V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Piti Disyatat

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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