Assessment of the Relationship Between Financial and Business Cycles Considering Heterogeneity in Budget Deficits, Financing Methods, and Current Account Status

Document Type : Research Paper

Authors

Department of Economics, Shi. C., Islamic Azad University, Shiraz, Iran.

Abstract

The occurrence of business cycles and economic fluctuations is a central issue in economics. The emergence of business cycles has often led to challenges for economies, creating unwanted periods of inflation or recession that result in adverse economic conditions. Among the factors that can influence business cycles is the performance of the financial sector. This study employs a Panel VAR model to evaluate the relationship between financial and business cycles in developing countries over the period from 1990 to 2021. The study divides 68 developing countries into six groups based on their budget deficit status, predominant financing method, and current account status to identify potential heterogeneity in the relationship between financial and business cycles. The findings indicate a bidirectional causality between financial and business cycles across all six groups of countries (characterized by high or low budget deficits, bank-based or market-based financing, and current account surpluses or deficits). Additionally, the results suggest that financing methods, budget deficit status, and current account balances influence the intensity of the impact of financial cycles on business cycles in developing countries. Given the severe budget deficit and the significant role of banks in financing enterprises in Iran, it can be argued that financial cycles have a substantial effect on the real sector of the Iranian economy, with a thriving financial sector likely to expand activities and stimulate economic growth.

Keywords

Main Subjects

References

Abdollahzade, M. & Zare, H. (2020). Evaluation of Monetary Instability effects on Output and Inflation during Business Cycles in Iran’s Economy. Journal of Applied Economics Studies in Iran, 9(34), 215-249. doi: 10.22084/aes.2020.19346.2891. (In Persian).
Adarov, A. (2021). Dynamic interactions between financial cycles, business cycles and macroeconomic imbalances: A panel VAR analysis. International Review of Economics & Finance, 74, 434-451.‏
Adrian, T., & Shin, H. S. (2010). Financial intermediaries and monetary economics. In Handbook of monetary economics, Elsevier, 3(1), 601-650.
Ameri, M. (2023). Examining the dynamic relationship between financial cycles, business cycles, and macroeconomic imbalances in Iran’s economy using a vector autoregression approach. 17th International Conference on Management, Economics, and Development. https://civilica.com/doc/1687382 (In Persian).
Antonakakis N. Breitenlechner M. Scharler J. 2015. Business cycle and financial cycle spillovers in the G7 countries. The Quarterly Review of Economics and Finance, 58: 154–162.
Awad, I. M., & Al Karaki, M. S. (2019). The impact of bank lending on Palestine economic growth: an econometric analysis of time series data. Financial Innovation, 5(1), 14, 1-21.
Bank for International Settlements (BIS). (2014). 84th Annual Report: 1 April 2013–31 March 2014. Basel: Bank for International Settlements, 65-68.
Bernanke, B. S., & Gertler, M. (1995). Inside the black box: the credit channel of monetary policy transmission. Journal of Economic perspectives, 9(4), 27-48.
Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handbook of macroeconomics, 1, 1341-1393.
Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, 182-198.
Broadberry, S., Chadha, J. S., Lennard, J., & Thomas, R. (2023). Dating business cycles in the United Kingdom, 1700–2010. The Economic History Review, 76(4), 1141-1162.‏
Cagliarini, A., & Price, F. (2017). Exploring the Link between the Macroeconomic and Financial Cycles| Conference–2017, 7-50.
Canova, F., & Ciccarelli, M. (2013). Panel Vector Autoregressive Models: A Survey, The views expressed in this article are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem. In VAR models in macroeconomics–new developments and applications: Essays in honor of Christopher A. Sims (pp. 205-246). Emerald Group Publishing Limited.
Claessens, S., Kose, M. A., & Terrones, M. E. (2012). How do business and financial cycles interact?. Journal of International economics, 87(1), 178-190.
Dlamini, L., & Ngalawa, H. (2022). Macroprudential policy and house prices in an estimated Dynamic Stochastic General Equilibrium model for South Africa. Australian Economic Papers, 61(2), 304-336.‏
Drehmann, M., Borio, C. E., & Tsatsaronis, K. (2012). Characterising the financial cycle: don't lose sight of the medium term, BIS Working Paper No. 380, 1-48.
Fathi Aghababa, M., Azizi, Kh., & Mahmoudzadeh, M. (2020). Examining the impact of banking facilities on economic growth (a steady-state approach). Economic Research and Policies Journal, 28(94), 427-455(In Persian).
Garg, R., & Sah, A. N. (2024). Cyclical dynamics and co-movement of business, credit, and investment cycles: empirical evidence from India. Humanities and Social Sciences Communications, 11(1), 1-12.‏
Gertler, M., & Karadi, P. (2011). A model of unconventional monetary policy. Journal of monetary Economics, 58(1), 17-34.
Gholami Heidaryani, L., Ranjpour, R., & Fallahi, F. (2021). Exploring the relationship between stock cycles and business cycles in Iran's economy; a spillover index approach. Economic Growth and Development Research, 11(42), 109-130 (In Persian).
Ha, J., Kose, M. A., Otrok, C., & Prasad, E. S. (2020). Global macro-financial cycles and spillovers (No. w26798). National Bureau of Economic Research.‏ Working Paper 26798, 1-79.
Hiebert, P., Jaccard, I., & Schüler, Y. (2018). Contrasting financial and business cycles: Stylized facts and candidate explanations. Journal of Financial Stability, 38, 72-80.‏
Hodrick, R. J., & Prescott, E. C. (1997). Postwar U.S. Business Cycles: An Empirical Investigation. Journal of Money, Credit and Banking, 29(1), 1–16.
Jordà, Ò., Schularick, M., & Taylor, A. M. (2013). When credit bites back. Journal of money, credit and banking, 45(s2), 3-28.‏
Karagol, V., & Dogan, B. (2021). Interaction between business and financial cycles: evidence from Turkey. Eastern Journal of European Studies, 12(2).
Khosravi, F., Eskandari Sabzi, S., Haghkhah, D., Gharadaghi, R., & Salmanpour Zenuz, A. (2022). Analysis of the impact and influence of banking facilities on business cycles, differentiating between the service and housing sectors in Iran's economy. Economics and Modeling, 13(2), 37-63 (In Persian).
Kindleberger, C. P. (1978). Bernhard Harms lecture: The aging economy. Weltwirtschaftliches Archiv, (H. 3), 407-421.
Kiyotaki, N., & Moore, J. (1997). Credit cycles. Journal of political economy, 105(2), 211-248.
Kydland, F. E., & Prescott, E. C. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of political economy, 85(3), 473-491.
Li, H., Zhou, X., Tang, M., & Guo, L. (2022). Impact of Population Aging and Renewable Energy Consumption on Agricultural Green Total Factor Productivity in Rural China: Evidence from Panel VAR Approach. Agriculture, 12(5), 715.‏
Li, L., Strahan, P. E., & Zhang, S. (2020). Banks as lenders of first resort: Evidence from the COVID-19 crisis. The Review of Corporate Finance Studies, 9(3), 472-500.
Li, X. L., Yan, J., & Wei, X. (2021). Dynamic connectedness among monetary policy cycle, financial cycle and business cycle in China. Economic Analysis and Policy, 69, 640-652.
Love, I., & Zicchino, L. (2006). Financial development and dynamic investment behavior: Evidence from panel VAR. The Quarterly Review of Economics and Finance, 46(2), 190–210.
Mandler, M., & Scharnagl, M. (2022). Financial cycles across G7 economies: A view from wavelet analysis. The Journal of Economic Asymmetries, 26, e00277.‏
Martínez-García, E., Grossman, V., & Mack, A. (2015). A contribution to the chronology of turning points in global economic activity (1980–2012). Journal of Macroeconomics, 46, 170-185.‏
Mazahfernia, M., Fallah Shams Layalestani, M., & Zomorodian, G. (2023). Dynamic spillovers between the currency and stock markets in Iran's business cycles. Financial Economics (Finance and Development), 17(2), 355-374 (In Persian).
Mehrara,M. , barkhordari,S. and Ebrahimzadeghan,H. (2020). The effect of Financial and Real Assets on Business Cycle in Iran: STAR Approach. Economic Research and Perspectives, 20(1), 128-105. (In Persian).
Mendoza, E. G. (2010). Sudden stops, financial crises, and leverage. American Economic Review, 100(5), 1941-66.‏
Minsky, H. (2016). The financial instability hypothesis: a restatement. In Can It Happen Again. Routledge, 124-151.
Mojab, R., Barakchian, S.M. (2014). A Sensitivity Analysis of the Identification of Business Cycles to the Choice of the Statistical Method. Journal of Monetary & Banking Research, 7(21), 381-405 (In Persian).
Oman, W. (2019). The synchronization of business cycles and financial cycles in the euro area. International Journal of Central Banking, 15(1), 327-362.‏
Peersman, G., & Wagner, W. B. (2014). Shocks to bank lending, risk-taking, securitization, and their role for US business cycle fluctuations.
  Ravn, M. O., & Uhlig, H. (2002). On Adjusting the Hodrick–Prescott Filter for the Frequency of Observations. Review of Economics and Statistics, 84(2), 371–376.
Romer, C. D. & Romer, D. H. (2020). ‘NBER Recession Dates: Strengths, Weaknesses, and a Modern Upgrade’, Mimeo.
Schularick, M., & Taylor, A. M. (2012). Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review, 102(2), 1029-1061.
Seifi Kashki, A., Mohseni Zanuzi, J., & Rezazadeh, A. (2020). Investigating the relationship between credit cycles and business cycles in Iran's economy. Economic Research (Growth and Sustainable Development), 20(3), 1-32 (In Persian).
Shakeri Bostanabad, R., & Ansari, V. (2023). The relationship between banking facilities and economic growth in Iran: Evidence from the financial social accounting matrix. Quantitative Economic Research Journal, Online Publication, 1-37 (In Persian).
Shaygan Mehr, S., Hadian, E., Dehghan Shabani, Z. and Rostamzadeh, P. (2024). Evaluation of the Welfare Effects of Different Monetary Rules during Boom and Recession Periods in the Iranian Economy. Iranian Journal of Economic Studies, 13(1), 179-210.
Shen, C. H., Shi, J. G., & Wu, M. W. (2019). Is finance a veil? Lead‐and‐lag relationship between financial and business cycles: The case of China. European Financial Management, 25(4), 978-1012.
Škare, M., & Stjepanović, S. (2016). Measuring business cycles: A review. Contemporary Economics, 10(1), 83-94.‏
Soleimani, F., Shahiki Tash, M. N., Zamanian, G., & Zamani, R. (2023). Interaction between Financial Cycles and Business Cycles in Iran: A Bayesian Approach. Iranian Economic Review, 27(2), 583-617.‏
Stiglitz, J. and Weiss, A. (1988). Banks as Social Accountants and Screening Devices for the Allocation of Credit. NBER Working Papers 2710, 1-54.
Stockhammer, E., & Gouzoulis, G. (2023). Debt-GDP cycles in historical perspective: the case of the USA (1889–2014). Industrial and Corporate Change, 32(2), 317-335.‏
Taheri Bazkhaneh, S., Ehsani, M., & Gilak Hakimabadi, M. (2018). A dynamic analysis of financial and business cycles and the inflation gap in Iran: An application of wavelet transform. Economic Growth and Development Research, 9(33), 121-140 (In Persian).
Tsiakas, I., & Zhang, H. (2023). On the direction of causality between business and financial cycles. Journal of Risk and Financial Management, 16(10), 430.‏
Yan, C., & Huang, K. X. (2020). Financial cycle and business cycle: An empirical analysis based on the data from the US. Economic Modelling, 93, 693-701.
Zare, H. & Azhdarnia, F. (2019). Modeling Multiple Regimes in Iranian Business Cycle: A Dynamic Approach. Quarterly Journal of Quantitative Economics (JQE), 16(3), 89-129. doi: 10.22055/jqe.2019.25272.1844. (In Persian).

Files

History

  • Receive Date: 01 October 2025
  • Revise Date: 27 December 2025
  • Accept Date: 04 January 2026

Share

How to cite

Statistics