Contrasting financial and business cycles: Stylized facts and candidate explanations

This paper contrasts the empirical features of financial and business cycles of 13 European Union countries, and discusses candidate theoretical mechanisms which could explain these differences. Relative to their business cycle counterparts, we show that financial cycles have a higher amplitude, a longer duration and exhibit far greater symmetry. Mostly owing to this difference in symmetry, we find that financial and business cycles synchronise on average only two-thirds of the time, exhibiting weaker concordance in countries having experienced very persistent financial downturns. We then relate our empirical results to the literature by reviewing five model mechanisms that could potentially underlie these facts. Overall, our results suggest that macroeconomic stabilization and financial stability objectives can, at times, be in conflict.