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.

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Main Subjects

Iranian Journal of Economic Studies
Volume 14, Issue 2 - Serial Number 28
Issue in Progress
2025
Pages 547-583

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History

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

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