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Is finance a veil? Lead‐and‐lag relationship between financial and business cycles: The case of China

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  • Chung‐Hua Shen
  • Jun‐Guo Shi
  • Meng‐Wen Wu

Abstract

This study examines the lead‐and‐lag relationship between financial cycles (FCs) and business cycles (BCs) by using Chinese provincial data. We construct FCs of the financial sector on the basis of three financial variables: credit‐to‐GDP (gross domestic product) ratios, house prices, and equity prices. We use the panel dynamic logit model to investigate the lead‐and‐lag effect between two sectors. Results show that each province has its own unique FCs and BCs. Hence, financial policies should be different in dissimilar provinces. Next, we find that FCs lead BCs and not vice versa. Furthermore, the leading effect is stronger in rich provinces than in poor areas.

Suggested Citation

  • Chung‐Hua Shen & Jun‐Guo Shi & Meng‐Wen Wu, 2019. "Is finance a veil? Lead‐and‐lag relationship between financial and business cycles: The case of China," European Financial Management, European Financial Management Association, vol. 25(4), pages 978-1012, September.
    • Handle: RePEc:bla:eufman:v:25:y:2019:i:4:p:978-1012
    DOI: 10.1111/eufm.12193
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