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Financial Cycles

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Author Info

  • Marco Terrones
  • M. Ayhan Kose
  • Stijn Claessens

Abstract

This paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960:1-2007:4. Specifically, we analyze cycles in credit, house prices, and equity prices. We report three main results. First, financial cycles tend to be long and severe, especially those in housing and equity markets. Second, they are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high as well, mainly for credit and equity cycles, and has been increasing over time. Third financial cycles accentuate each other and become magnified, especially during coincident downturns in credit and housing markets. Moreover, globally synchronized downturns tend to be associated with more prolonged and costly episodes, especially for credit and equity cycles. We discuss how these findings can guide future research on various aspects of financial market developments.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/76.

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Length: 40
Date of creation: 01 Apr 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/76

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Keywords: Developed countries; Housing prices; Stock prices; financial cycles; financial crises; financial markets; equity markets; credit booms; financial crisis; financial booms; recessions; severe financial crises; financial market; recession; financial liberalization; banking crises; financial intermediation; stock market; financial integration; financial crisis literature; equity market; domestic financial markets; global financial crisis; credit boom; asset markets; systemic banking crises; deposit money banks; capital account liberalization; international financial markets; early warning system; financial intermediaries; financial globalization; stock market cycles; bonds; contagion; deposit money; international finance; stock markets; financial system; money markets; bond; financial economics;

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References

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  1. Viv B. Hall & John McDermott, 2006. "The Ups and Downs of New Zealand House Prices," Working Papers, Motu Economic and Public Policy Research 06_03, Motu Economic and Public Policy Research.
  2. Claessens, Stijn & Kose, M. Ayhan & Terrones, Marco E., 2012. "How do business and financial cycles interact?," Journal of International Economics, Elsevier, Elsevier, vol. 87(1), pages 178-190.
  3. Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," Handbook of Monetary Economics, Elsevier, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422 Elsevier.
  4. William N.Goetzmann & Lingfeng Li & K.Geert Rouwenhorst, 2003. "Long-Term Global Market Correlations," DNB Staff Reports (discontinued), Netherlands Central Bank 98, Netherlands Central Bank.
  5. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 100, July.
  6. Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets: A Review," IMF Working Papers 00/48, International Monetary Fund.
  7. Jeffrey A. Frankel & Eduardo A. Cavallo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality," NBER Working Papers 10957, National Bureau of Economic Research, Inc.
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  9. Ehrmann, Michael & Fratzscher, Marcel & Rigobon, Roberto, 2005. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Working Paper Series, European Central Bank 0452, European Central Bank.
  10. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  11. Edwards, Sebastian & Biscarri, Javier Gomez & Perez de Gracia, Fernando, 2003. "Stock market cycles, financial liberalization and volatility," Journal of International Money and Finance, Elsevier, Elsevier, vol. 22(7), pages 925-955, December.
  12. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
  13. Bekaert, Geert & Harvey, Campbell R. & Lumsdaine, Robin L., 2002. "Dating the integration of world equity markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(2), pages 203-247, August.
  14. Tobias Adrian & Hyun Song Shin, 2010. "The Changing Nature of Financial Intermediation and the Financial Crisis of 2007–2009," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 2(1), pages 603-618, 09.
  15. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers 14049, National Bureau of Economic Research, Inc.
  16. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(2), pages 365-381, March.
  17. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
  18. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  19. Ethan Cohen-Cole & Burcu Duygan-Bump & José Fillat & Judit Montoriol-Garriga, 2008. "Looking behind the aggregates: a reply to “Facts and Myths about the Financial Crisis of 2008”," Risk and Policy Analysis Unit Working Paper, Federal Reserve Bank of Boston QAU08-5, Federal Reserve Bank of Boston.
  20. Quinn, Dennis & Voth, Hans-Joachim, 2008. "Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7013, C.E.P.R. Discussion Papers.
  21. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises," IMF Working Papers 10/146, International Monetary Fund.
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