BIS Working Papers 
                                                                                                                                                                                                                                                                                                                                       No 395 
                                                                                                                                                                                                                                                                                                                                       The financial cycle and 
                                                                                                                                                                                                                                                                                                                                       macroeconomics:  
                                                                                                                                                                                                                                                                                                                                       What have we learnt? 
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                       by Claudio Borio 
                                                                                                                                                                                                                                                                                                                                       Monetary and Economic Department 
                                                                                                                                                                                                                                                                                                                                       December 2012 
                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                       JEL classification: E30, E44, E50, G10, G20, G28, H30, H50 
                                                                                                                                                                                                                                                                                                                                        
                                                                                                                                                                                                                                                                                                                                       Keywords: financial cycle, business cycle, medium term, financial 
                                                                                                                                                                                                                                                                                                                                       crises, monetary economy, balance sheet recessions, balance sheet 
                                                                                                                                                                                                                                                                                                                                       repair. 
                                                             
                                                             
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                         BIS Working Papers are written by members of the Monetary and Economic Department of 
                                                                                         the Bank for International Settlements, and from time to time by other economists, and are 
                                                                                         published by the Bank. The papers are on subjects of topical interest and are technical in 
                                                                                         character. The views expressed in them are those of their authors and not necessarily the 
                                                                                         views of the BIS. 
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                         This publication is available on the BIS website (www.bis.org). 
                                                                                          
                                                                                          
                                                                                         ©  Bank for International Settlements 2012.  All rights reserved. Brief excerpts may be 
                                                                                                        reproduced or translated provided the source is stated. 
                                                                                          
                                                                                          
                                                                                         ISSN 1020-0959 (print) 
                                                                                         ISSN 1682-7678 (online) 
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
                                                                                          
                                                                                                                                             The financial cycle and macroeconomics:  
                                                                                                                                                                                                                        What have we learnt? 
                                                                                                                                                                                                                                                                     Claudio Borio 
                                                                                                                                                                                                                                                                            Abstract 
                                                            It is high time we rediscovered the role of the financial cycle in macroeconomics. In the 
                                                            environment that has prevailed for at least three decades now, it is not possible to 
                                                            understand business fluctuations and the corresponding analytical and policy challenges 
                                                            without understanding the financial cycle. This calls for a rethink of modelling strategies and 
                                                            for significant adjustments to macroeconomic policies. This essay highlights the stylised 
                                                            empirical features of the financial cycle, conjectures as to what it may take to model it 
                                                            satisfactorily, and considers its policy implications. In the discussion of policy, the essay pays 
                                                            special attention to the bust phase, which is less well explored and raises much more 
                                                            controversial issues.  
                                                             
                                                            JEL Classification: E30, E44, E50, G10, G20, G28, H30, H50 
                                                            Keywords: financial cycle, business cycle, medium term, financial crises, monetary economy, 
                                                            balance sheet recessions, balance sheet repair. 
                                                             
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