The impact of risk cycles on business cycles: a historical view
Danielsson, J.
, Valenzuela, M. & Zer, I.
(2023).
The impact of risk cycles on business cycles: a historical view.
Review of Financial Studies,
36(7), 2922 - 2961.
https://doi.org/10.1093/rfs/hhac091
, Valenzuela, M. & Zer, I.
(2023).
The impact of risk cycles on business cycles: a historical view.
Review of Financial Studies,
36(7), 2922 - 2961.
https://doi.org/10.1093/rfs/hhac091
We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.
Explore Further
- F30 - General
- G15 - International Financial Markets
- G18 - Government Policy and Regulation
- N10 - General, International, or Comparative
- N20 - General, International, or Comparative
-
Danielsson, J., Valenzuela, M. & Zer, I.
(2023).
Replication Data for: The Impact of Risk Cycles on Business Cycles: A Historical View.
[Dataset]. Harvard Dataverse.
https://doi.org/10.7910/dvn/oou2ae
