Nexus Between Financial Cycle and Business Cycle in India
The present paper attempts to explore the possible interdependence between business cycle and financial cycle in India during 1996Q1–2018Q3. Quarterly data of macroeconomic variables, namely real GDP, credit to GDP ratio, real house prices, real equity pr
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Nexus Between Financial Cycle and Business Cycle in India Kundan Kumar , Zeeshan Nezami Ansari, and Rajendra Narayan Paramanik
Abstract The present paper attempts to explore the possible interdependence between business cycle and financial cycle in India during 1996Q1–2018Q3. Quarterly data of macroeconomic variables, namely real GDP, credit to GDP ratio, real house prices, real equity prices and real effective exchange rate have been used for the analysis. The cyclical components of the variables are generated by the frequency filter technique of Christiano–Fitzgerald. The identification of peaks and troughs has been done using turning point analysis of Bry and Boschan (National Bureau of Economic Research 1971). Degree of co-movement between two cycles is found by Harding and Pagan (Journal of Monetary Economics, 49(2):365–381 2002) technique. To explore the long-run relation between the business cycle and financial cycle, spectral Granger causalitytest (Breitung and Candelon) has been conducted. The empirical finding reveals that the cyclical component of financial variable Granger causes the cyclical component of the gross domestic product in the medium as well as long runs and vice versa. Keywords Business cycle · Financial cycle · Turning point · Spectral granger causality
2.1 Introduction Economic literature described business cycle (BC henceforth) as upward and downward movement of aggregate economic output over a time period and it is measured using real GDP data whereas, financial cycle (FC henceforth) maps out the expansions and contractions in the financial activities (Behera and Sharma, RBI 2019). Seminal work of Burn and Mitchell (1946) laid the foundation for empirical business cycle analysis in modern macroeconomics. Economic literature mainly documents the features of output and its different phases like recovery and recession in early studies. Later on, financial cycle gathered academic attention for further scrutiny K. Kumar (B) · Z. N. Ansari · R. N. Paramanik Department of Humanities and Social Sciences, IIT Patna, Bihta, India e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 A. K. Mishra et al. (eds.), The Financial Landscape of Emerging Economies, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-3-030-60008-2_2
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along with notions like political business cycle (Rogoff et al. 1988; Nordhaus et al. 1989) and their impact on the real economy. FC is generally gauged through variation in variables like credit, credit to GDP, exchange rate, etc. Notional existence of business cycle in theoretical literature necessitates empirical construct to identify the cycle from the aforementioned macro-financial variables. The battery of statistical techniques such as time series filter of Hodrick and Prescott (1997) and frequency filter of Baxter and King (1999) and Christian and Fitzgerald (2003) are proposed to extract the unobservable cyclical component f
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