A unified approach for jointly estimating the business and financial cycle, and the role of financial factors

Tino Berger, Julia Richter and Benjamin Wong

No 02/2021, Working Papers from German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung

Abstract: We jointly estimate the U.S. business and financial cycle through a unified empirical approach while simultaneously accounting for the role of financial factors. Our approach uses the Beveridge-Nelson decomposition within a medium-scale Bayesian Vector Autore-gression. First, we show, both in reduced form and when we identify a structural financial shock, that variation in financial factors had a larger role post-2000 and a more modest role pre-2000. Our results suggest that the financial sector did play a role in overheatingthe 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 (search for similar items in EconPapers)
JEL-codes: C18 E32 E51 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: A unified approach for jointly estimating the business and financial cycle, and the role of financial factors (2022)
Working Paper: A Unified Approach for Jointly Estimating the Business and Financial Cycle, and the Role of Financial Factors (2021)
Working Paper: A unified approach for jointly estimating the business and financial cycle, and the role of financial factors (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:svrwwp:022021

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