This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:12007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy. Virtually all advanced economies and many emerging markets have experienced recessions during the past three years. A common feature of these recessions was that they were accompanied by various types of financial disruptions, including contractions in the supply of credit and sharp declines in asset prices. These developments have led to an intensive debate in the profession about the links between macroeconomics and finance, and have propelled the study of interactions between business cycles and financial cycles to the forefront of research. Our knowledge about the interactions between real and financial sectors during different phases of business and financial cycles is rather limited.

This is in large part as most studies have a small set of observations to work with, using a single country (often the United States) or a few advanced countries. The importance of studying the global dimensions of these interactions, however, can no longer be ignored as the dramatic cost of the global financial crisis has shown. This paper aims to broaden our empirical understanding of these interactions using a rich database of a large number of countries over a long period. Our dataset includes 44 advanced and emerging economies over the period 1960:1–2007:4. We exclude from our analysis the years following the recent crisis because many episodes of business and financial cycles associated with the crisis are still ongoing. The main variable we use to characterize business cycles is output. To provide a broad perspective on financial cycles, we employ three measures: credit, house, and equity prices. In terms of methodology, we rely on the “classical” definition of a cycle, since it offers a simple but effective procedure to identify turning points in business and financial cycles.