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Does the Real Business Cycle Help Forecast the Financial Cycle?

Author

Listed:
  • Fredj Jawadi

    (Univ. Lille, ULR 4999 - LUMEN)

  • Hachmi Ben Ameur

    (INSEEC School of Business and Economics)

  • Stephanie Bigou

    (Seeyond)

  • Alexis Flageollet

    (Seeyond)

Abstract

This study investigates the relationship between the financial market and the real business cycle in the US from February 1987 to March 2016. Using different monthly time-series as proxies for the financial and macroeconomic cycles, we first specify the determinants and then build two indicators to measure the financial and real business cycles based on principal component analysis. We identify not only the main different cycles for each indicator but also measure the duration of the phases for each indicator. Second, we study the relationship between economic and financial indicators per cycle and per phase using a vector autoregressive model. Our findings show that the economic indicator is useful to forecast the financial, and that there exists a significant relationship between the financial and economic cycles that is actively stronger during the “expansion–growth” phase. This result enables investors and policymakers to better forecast the future dynamics of financial sector using the information provided by the analysis of the real business cycle.

Suggested Citation

  • Fredj Jawadi & Hachmi Ben Ameur & Stephanie Bigou & Alexis Flageollet, 2022. "Does the Real Business Cycle Help Forecast the Financial Cycle?," Computational Economics, Springer;Society for Computational Economics, vol. 60(4), pages 1529-1546, December.
    • Handle: RePEc:kap:compec:v:60:y:2022:i:4:d:10.1007_s10614-021-10193-8
    DOI: 10.1007/s10614-021-10193-8
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    Cited by:

    1. Ridhima Garg & A. N. Sah, 2024. "Cyclical dynamics and co-movement of business, credit, and investment cycles: empirical evidence from India," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-12, December.

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    More about this item

    Keywords

    Financial cycle; Real business cycle; PCA; Connectedness; VAR;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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