The Financial Cycle and Macroeconomics: What Have We Learnt?
39 Pages Posted: 5 Jan 2013 Last revised: 13 May 2014
Date Written: December 2012
It is high time we rediscovered the role of the financial cycle in macroeconomics. In the environment that has prevailed for at least three decades now, it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies. This essay highlights the stylised empirical features of the financial cycle, conjectures as to what it may take to model it satisfactorily, and considers its policy implications. In the discussion of policy, the essay pays special attention to the bust phase, which is less well explored and raises much more controversial issues.
Keywords: financial cycle, business cycle, medium term, financial crises, monetary economy, balance sheet recessions, balance sheet repair
JEL Classification: E30, E44, E50, G10, G20, G28, H30, H50
Suggested Citation: Suggested Citation