New Publication: "A Unified Approach for Jointly Estimating the Business and the Financial Cycle, and the Role of Financial Factors"

The Chair of Empirical International Economics, in collaboration with Julia Richter and Benjamin Wong has published a new paper in the Journal of Economic Dynamics and Control (forthcoming).

The link can be found here.

The paper estimates the U.S. business and financial cycle using a unified empirical approach. Within the framework of a medium-size Bayesian vector autoregression, the Beveridge- Nelson decomposition approach is used to identify structural financial shocks.

The results show that variations in financial factors after 2000 played a larger role than those before 2000. Moreover, the paper finds that the financial sector played a significant role in the overheating of the business cycle before the Great Recession.
Furthermore, the paper shows a positive unconditional correlation between the credit cycle and the output gap. However, the correlation between the lagged credit cycle and the contemporaneous output gap becomes negative when a financial shock is assumed. This implies, that in order to understand the relationship between the business cycle and the financial cycle thoroughly, the nature of the underlying shocks is of great importance.