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Assessing the cross-country interaction of financial cycles: evidence from a multivariate spectral analysis of the USA and the UK

Author

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  • Till Strohsal

    (Freie Universität Berlin)

  • Christian R. Proaño

    (Otto-Friedrich-Universität Bamberg)

  • Jürgen Wolters

    (Freie Universität Berlin)

Abstract

In recent times, a large number of studies has investigated the empirical properties of financial cycles within countries, mainly based on band-pass filter techniques. The contribution of this paper to the literature is twofold. First, in contrast to most existing studies in the financial cycle literature, we perform a multivariate parametric frequency domain analysis which takes the complete (cross-) spectrum into account and not only certain frequencies. Second, we provide evidence on the cross-country interaction of financial cycles. We focus on the USA and UK and use frequency-wise Granger causality analysis as well as structural break tests to obtain three main results. The relation between cycles has recently intensified. There is a significant Granger causality from the US financial cycle to the UK financial cycle, but not the other way around. This relationship is most pronounced for cycles between 8 and 30 years.

Suggested Citation

  • Till Strohsal & Christian R. Proaño & Jürgen Wolters, 2019. "Assessing the cross-country interaction of financial cycles: evidence from a multivariate spectral analysis of the USA and the UK," Empirical Economics, Springer, vol. 57(2), pages 385-398, August.
    • Handle: RePEc:spr:empeco:v:57:y:2019:i:2:d:10.1007_s00181-018-1471-2
    DOI: 10.1007/s00181-018-1471-2
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    Cited by:

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    2. Christian Menden & Christian R. Proaño, 2017. "Dissecting the financial cycle with dynamic factor models," Quantitative Finance, Taylor & Francis Journals, vol. 17(12), pages 1965-1994, December.
    3. Santander Quino, Camila Miriam, 2022. "Ciclos económicos y financieros: Una aproximación empírica para Bolivia," Documentos de trabajo 1/2022, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    4. Ashe, Sinéad & Egan, Paul, 2023. "Examining financial and business cycle interaction using cross recurrence plot analysis," Finance Research Letters, Elsevier, vol. 51(C).
    5. Martin Mandler & Michael Scharnagl, 2022. "Financial Cycles in Euro Area Economies: A Cross‐Country Perspective Using Wavelet Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 569-593, June.
    6. Mandler, Martin & Scharnagl, Michael, 2022. "Financial cycles across G7 economies: A view from wavelet analysis," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).

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    More about this item

    Keywords

    Financial cycle; Vector autoregressions; Indirect spectrum estimation; Coherency; Granger causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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