OECD Economics Department Working Papers

ISSN :: 1815-1973 (online)
DOI :: 10.1787/18151973

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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The Nature of Financial and Real Business Cycles

The Great Moderation and Banking Sector Pro-Cyclicality

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Authors:

Balázs Égert¹, Douglas Sutherland¹

Author Affiliations

1: OECD, France

Publication Date

09 Jan 2012

Bibliographic information

No.:: 938

Pages

DOI

10.1787/5k9h28k3gt24-en

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This paper takes a fresh look at the nature of financial and real business cycles in OECD countries using annual data series and shorter quarterly and monthly economic indicators. It first analyses the main characteristics of the cycle, including the length, amplitude, asymmetry and changes of these parameters during expansions and contractions. It then studies the degree of economic and financial cycle synchronisation between OECD countries but also of economic and financial variables within a given country, and gauges the extent to which cycle synchronisation changed over time. Finally, the paper provides some new evidence on the drivers of the great moderation and analyses the banking sector’s pro-cyclicality by using aggregate and bank-level data. The main findings show that the amplitude of the real business cycle was becoming smaller during the great moderation, but asset price cycles were becoming more volatile. In part this was linked to developments in the banking sector which tended to accentuate pro-cyclical behaviour.

Keywords:: financial markets, real business cycles, great moderation, banking system, financial cycles

JEL Classification:

E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations; Cycles
E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy