Global Financial Cycles Since 1880

Abstract

We analyze cyclical co-movement in credit, house prices, equity prices, and longterm interest rates across 17 advanced economies. Using a time-varying multi-level dynamic factor model and more than 130 years of data, we analyze the dynamics of co-movement at different levels of aggregation and compare recent developments to earlier episodes such as the early era of financial globalization from 1880 to 1913 and the Great Depression. We find that joint global dynamics across various financial quantities and prices as well as variable-specific global co-movements are important to explain fluctuations in the data. From a historical perspective, global co-movement in financial variables is not a new phenomenon, but its importance has increased for some variables since the 1980s. For equity prices, global cycles play currently a historically unprecedented role, explaining more than half of the fluctuations in the data. Global cycles in credit and housing have become much more pronounced and longer, but their importance in explaining dynamics has only increased for some economies including the US, the UK and Nordic European countries. We also include GDP in the analysis and find an increasing role for a global business cycle.

Business and Financial Cycles in a Globalized World

“…However, the variance decomposition in Table 3.1 also shows strong co-movement across countries the gaps of credit and house prices as indicated by a sizable relative importance of the common international financial factor for these variables. This confirms previous findings in the literature documenting the existence of global cycles in credit and house prices (e.g., see Hirata, Kose, Otrok, and Terrones, 2013;Jordà, Schularick, Taylor, and Ward, 2019;Potjagailo and Wolters, 2020). Notes: Variance shares measure the contribution of each factor to the cyclical variation in each variable.…”

Alternative Measures for the Global Financial Cycle: Do They Make a Difference?

“…Although studies discussed above measure the GFCy as the co-movement among asset prices, credit, and/or capital flows around the globe using a static or dynamic global factor model (Aldasoro et al, 2020;MA-R, 2020;Potjagailo and Wolters, 2019;Scheubel et al, 2019), they use different samples of countries, time periods, and variables. Some analyze a cycle among several financial variables, while others identify a GFCy in individual financial variables.…”

“…For instance, MA-R and Aldasoro et al (2020) identify a GFCy in asset prices and capital flows, but do not consider the global co-movement of individual variables. Ha et al (2020) and Potjagailo and Wolters (2019) find evidence for a GFCy in asset-specific variables, like equity prices, commodity prices, and credit, but do not consider GFCys in capital flows and asset prices. These differences reflect that there is no consensus regarding the concept and measurement of the GFCy.…”

The Credit Composition of Global Liquidity

“…Rey (2013) for the case of asset price cycles). Recently, Potjagailo and Wolters (2020) have shown the prevalence of financial co-movements in the very long-run. Cross-country financing conditions are in the focus of the global liquidity debate.…”