stronger. These results collectively highlight the importance of macro-financial linkages, especially those involving developments in credit and housing markets, for the real economy.

# Synchronisation and likelihood of cycles

Business cycles often move in tandem with financial cycles, especially with credit and house price cycles. One can study the degree of synchronisation between business and financial cycles by using the concordance statistic (Table 3).<sup>52</sup> Cycles in output and credit appear to be the most highly synchronised, with a median (mean) synchronisation of 0.81 (0.78). This means that cycles in output and credit are typically in the same phase about 80% of the time. The concordance statistic for cycles in output and house prices, 0.68 (0.64), is lower than that for output and credit but still slightly higher than that for output and equity prices, 0.58 (0.60). This reinforces the common finding that developments in credit and housing markets could be key in driving macro-financial linkages.

There are also differences in concordance between advanced economies and EMEs. Advanced economies typically display a higher degree of synchronisation of output, credit and house prices than EMEs. This may reflect the more developed nature of advanced country financial markets with the result that fluctuations in credit, house prices and other financial variables are more important to the real economy. It may also indicate that EMEs are more often affected by global shocks operation through international capital flows, including through actions of their residents (see for example Forbes and Warnock (2012) and Caballero and Simsek (2016)).

The likelihood of recessions and recoveries varies with the presence of financial disruptions or booms. The unconditional probability of being in a recession or a recovery in any given quarter is about 19%. However, if there is a financial disruption episode in the same quarter, the probability of a recession increases substantially, to 35% to 38%. Similarly, if a credit (house price) boom is already underway, the probability of experiencing a recovery rises to roughly 57% (43%). Rapid growth in equity prices is, however, not associated with greater likelihood of a recovery in the real economy.

# Interactions between cycles

Recessions accompanied by financial disruptions tend to be longer and deeper than other recessions. In particular, recessions associated with asset price busts are significantly longer than recessions without such disruptions (Figure 15). Recessions with severe asset price busts as well as credit crunches result in significantly larger drops in output and, correspondingly, greater cumulative output losses relative to those without such episodes.<sup>53</sup> A recession associated with one type of financial disruption is often accompanied by broader stress in other financial markets. For example, recessions accompanied by credit crunches result in a significant decline in credit as well as substantial drops in house and equity prices. One can also analyse recessions accompanied by combinations of credit crunches and asset busts. Although the number of such episodes is small, a recession associated with a

> 52 The concordance statistic provides a measure of the fraction of time that the two series are in the same phase of their respective cycles. The series are perfectly procyclical (countercyclical) if the concordance index is equal to unity (zero). 53 For a deeper perspective, it is useful to consider additional measures of credit and asset prices. For example, some papers (Chari et al (2008) and Cohen-Cole et al (2008)) highlight the importance of going beyond aggregate measures (for example, by differentiating credit to corporations from credit to households) to study the dynamics of credit markets. Unfortunately, such disaggregated series are not available for a large number of countries over long periods.

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