Financial cycles around the world

The recent global financial crisis has highlighted the importance of better understanding inherent instability in financial markets invoking recurrent boom‐bust cycles and leading to devastating macroeconomic effects. We use dynamic factor models and state‐space techniques to extract financial cycles for a global sample of 34 advanced and developing countries over the period 1960Q1–2015Q4 as a common factor using a large number of variables conveying price, quantity and risk dynamics in credit, housing, bond and equity markets. In addition to the four segment‐specific and aggregate national financial cycles estimated for each country, we also derive regional and global financial cycles. The analysis reveals highly persistent and recurring nature of financial cycles, which tend to fluctuate at frequencies lower than business cycles, 9–15 years on average, and are indicative of major financial distress episodes. The results point at notable intra‐regional synchronization between financial cycles and confirm the existence of a global financial cycle closely associated with the dynamics of the US T‐Bill rate and the VIX index.