Galina Potjagailo (Kiel Institute, Forecasting Center)
We analyze the evolving role and nature of global financial cycles over 130 years in terms of co-movement in credit growth, house prices, equity prices and long-term interest rates across 17 advanced economies. Using a flexible dynamic factor model, we find that both an aggregate financial cycle across sectors and variable-specific cycles at different frequencies are important to explain global co-movement. The estimated factors trace historic events well: during the Great Depression, the busts in global credit and GDP were particularly deep and prolonged, whereas during the recent Financial Crisis the bust in the aggregate global financial cycle was relatively more important. For equity prices, global cycles play a historically unprecedented role, explaining more than half of the fluctuations; for credit, house prices and interest rates, the role of global cycles is smaller and reached levels comparable to today during the early era of globalization from 1880 to 1913. There are linkages between global shocks in GDP and in financial variables, but their role has decreased since the early era of globalization.
Galina Potjagailo (Kiel Institute) — Maik Wolters (Friedrich Schiller University, Jena)