New evidence on financial cycles

Financial cycles are long – on average twice the length of business cycles. At the same time, there is substantial heterogeneity of national cycles across G-7 countries, ranging from very similar financial and business cycles in Germany to markedly different cycles in the United States and Italy. These are among the findings of research by Yves Schüler, Paul Hiebert and Toumas Peltonen, presented at the annual congress of the European Economic Association in Geneva in August 2016.

Their study concludes that policies targeting financial cycles (such as countercyclical macroprudential policies) can act as a powerful complement to traditional stabilisation policies targeting the business cycle (such as macroeconomic policies, including monetary policy) – particularly in periods when there may be a considerable disconnect between financial markets and the real economy.