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The declining explanatory power of interest rates for stock market and business cycle dynamics

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  • Geissel, S.
  • Klein, D.

Abstract

This study applies a multivariate wavelet framework to examine the time-varying relationship between stock market cycles and business cycles in Germany, Japan, the UK, and the USA from 2000 to 2025. Prior to 2020, stock market cycles generally led business cycles at medium- to longterm frequencies. Around 2020, this pattern reversed, indicating a structural shift. Controlling for key interest rates reduces regions of significant coherence during the Global Financial Crisis, but not around 2020, suggesting a diminished role of interest rates in explaining the joint dynamics of stock markets and business cycles in recent years.

Suggested Citation

  • Geissel, S. & Klein, D., 2026. "The declining explanatory power of interest rates for stock market and business cycle dynamics," Finance Research Letters, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finlet:v:91:y:2026:i:c:s1544612326000553
    DOI: 10.1016/j.frl.2026.109524
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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