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The Nature of Financial and Real Business Cycles: The Great Moderation and Banking Sector Pro-Cyclicality

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  • Balázs Égert
  • Douglas Sutherland

Abstract

This paper takes a fresh look at the nature of financial and real business cycles in OECD countries using annual data series and shorter quarterly and monthly economic indicators. It first analyses the main characteristics of the cycle, including the length, amplitude, asymmetry and changes of these parameters during expansions and contractions. It then studies the degree of economic and financial cycle synchronisation between OECD countries but also of economic and financial variables within a given country, and gauges the extent to which cycle synchronisation changed over time. Finally, the paper provides some new evidence on the drivers of the great moderation and analyses the banking sector’s pro-cyclicality by using aggregate and bank-level data. The main findings show that the amplitude of the real business cycle was becoming smaller during the great moderation, but asset price cycles were becoming more volatile. In part this was linked to developments in the banking sector which tended to accentuate pro-cyclical behaviour. Cycles économiques et financiers : la grande modération et la pro-cyclicalité du secteur bancaire Ce papier analyse la nature des cycles économiques et financiers dans les pays de l'OCDE en utilisant des séries annuelles, trimestrielles et mensuelles. Il analyse d'abord les principales caractéristiques du cycle, y compris la durée, l'amplitude, l'asymétrie et les changements de ces paramètres au cours des expansions et contractions. Il étudie ensuite le degré de synchronisation des cycles économiques et financiers entre les pays de l'OCDE, mais aussi des variables économiques et financières dans un pays donné, et évalue dans quelle mesure la synchronisation des cycles a changé au fil du temps. Enfin, le papier fournit quelques éléments nouveaux sur les facteurs de la grande modération et étudie la pro-cyclicité du secteur bancaire en utilisant des données agrégées et des banques individuelles. Les principaux résultats montrent que l'amplitude du cycle réel diminuait durant la grande modération, mais les cycles des prix des actifs ont été de plus en plus volatiles. Cela était en partie liée à l'évolution du secteur bancaire qui avait tendance à accentuer le comportement pro-cyclique.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 938.

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Date of creation: 09 Jan 2012
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Handle: RePEc:oec:ecoaaa:938-en

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Keywords: financial markets; real business cycles; financial cycles; banking system; great moderation; grande modération; cycles financiers; système bancaire; cycles économiques; marchés financiers;

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Cited by:
  1. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.
  2. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.

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