Financial cycle peaks coincide with crises - BIS paper

    Peaks in financial cycles of 16 years and longer tend to coincide very closely with crises that cause serious economic damage and the virulence of these cycles has increased since the mid-1980s, according to a working paper by economists at the Bank for International Settlements.

    Prior to the global financial crises, economists typically focused on business cycles and believed that interest rates captured the interplay between the financial and real sides of an country's economy. But the crises showed the failure of this understanding and the paper by the BIS economists is part of a wholesale rethink of the discipline of macroeconomics.

    The paper concludes that financial crises, or systemic banking crises, are linked to a policy regime of liberalizing the financial sector in an environment of monetary policy that is focused on price stability -- a finding that has major policy implications.

    "And we note that the authorities should watch out for what we call the “unfinished recession” phenomenon. Policy responses that fail to take (medium-term) financial cycles into account can help contain recessions in the short run but at the expense of larger recessions down the road," the paper said.

    For details, see the BIS working paper: "Characterising the financial cycle: don’t lose sight of the medium term! "

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