Business cycle and financial cycle spillovers in the G7 countries

Abstract

In this study we examine the dynamic interactions between credit growth and output growth using the spillover index approach of Diebold and Yilmaz (2012). Based on quarterly data on credit growth and GDP growth over the period 1957Q1-2012Q4 for the G7 countries we find that: (i) spillovers between credit growth and GDP growth evolve rather heterogeneously over time and across countries, and increase during extreme economic events. (ii) Spillovers between credit growth and GDP growth are of bidirectional nature, indicating bidirectional spillovers of shocks between the financial and the real sector. (iii) In the period shortly before and during the global financial crisis, the link between credit growth and GDP growth becomes more pronounced. In particular, the financial sector plays a dominant role during the early stages of the crisis, while the real sector quickly takes over as the dominant source of spillovers. (iv) Interestingly, credit growth in the US is the dominant transmitter of shocks to the G7 countries, and especially to other G7 countries' real sectors in the run up period to (and during) the global financial crisis. Overall, our results suggest that the magnitude and direction of spillovers between financial cycles and business cycles vary over time along with changes in the economic environment in the G7 countries.

Business Cycle and Financial Cycle Interdependence and the Rising Role of China in SAARC

“…Finally, we conclude that there is information spillover between business and financial cycles movements. These results confirm the findings of Antonakakis et al (2015) who report similar comovements in the case of G7 countries. The analyzed results seem relevant as many economies find high complementarity between financial sector growth and business cycle (see Bhaskaran and Ghosh 2010).…”

“…To the best of our knowledge, this is the first study that examines this phenomenon in the context of SAARC countries. The study of Antonakakis et al (2015) is close to our research. Their study examines the dynamic spillovers between real GDP and real credit growth in case of G7 countries for the period 1957Q1-2012Q4.…”

“…The estimated results indicate that the magnitude of total spillover index reached up to 36.70%, indicating a moderate level of interdependence between real credit growth and real economic growth. The extent of total spillover index is substantially lower than the study of Antonakakis et al (2015) who calculated for G7 countries. It also implies that there is limited interaction between financial and real growth sectors among these countries.…”

“…However, there are methodological issues related to the analysis of credit expansion and economic growth relationship. According to Antonakakis et al (2015), given the time-varying characteristics of financial timeseries, a dynamic framework is required to understand the time-varying interactions between credit expansion and economic growth particularly during the crisis and stable periods.…”

“…Numerous studies have used this method to examine different assets markets interaction including foreign exchange rates, equity markets, sovereign bond yield spreads, commodity derivatives and other financial assets spillovers. Some of the significant studies are Yilmaz (2009), , Antonakakis and Vergos (2013), Cronin (2014), Sehgal et al (2014Sehgal et al ( , 2015, Antonakakis et al (2015).…”