Although the literature on financial crises has employed broader samples, the identification of crises has often suffered from analytical drawbacks and the analysis has limited itself to a single phase of the cycle, the aftermath of a crisis.<sup>47</sup> Some recent studies, however, document the major features of macro-financial linkages using rich cross-country databases covering a long period of time. In this section, we present a summary of the findings of this work.<sup>48</sup> The section begins with an overview of the methodology and data sets used in these studies. This is followed by a discussion of the stylised facts that emerge from the data. The last sub-section considers the main properties of the linkages between business and financial cycles.

A number of salient facts emerge about the features of business and financial cycles and their interactions over different phases. First, financial cycles are often more pronounced than business cycles, with financial downturns deeper and more intense than recessions. Second, financial cycles can build on each other and become amplified. For example, credit downturns that overlap with house price busts tend to be longer and deeper than other credit downturns. Third, financial cycles appear to play an important role in shaping recessions and recoveries. In particular, recessions associated with financial disruptions, notably house price busts, are often longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger than other recoveries.

# A. Business and financial cycles

A number of methodologies have been developed to characterise business cycles. The findings reported in this section are based on the “classical” definition of a business cycle, which focuses on changes in levels of economic activity. The definition goes back to the pioneering work of Burns and Mitchell (1946) who laid the methodological foundations for the analysis of business cycles in the United States. Moreover, it constitutes the guiding principle of the Business Cycle Dating Committees of the National Bureau of Economic Research (NBER) and the Centre for Economic Policy Research (CEPR) in determining the turning points of US and European business cycles.<sup>49</sup> 47 Claessens and Kose (2014) review a number of studies that focus specifically on periods of financial stress and crisis and the behaviour of real and financial variables during such events. Reinhart and Rogoff (2008, 2009a, 2009b, 2014) review the characteristics of various types of financial crisis for many countries over a long period. Boissay et al (2016) analyse the links between credit booms, (interbank) liquidity and banking crises (see also Allen et al (2011)).

48 The notion of financial cycles was empirically documented in early studies for smaller samples of countries and periods of time, such as Borio et al (1994) and Borio and Lowe (2002), and refined in subsequent work, including Drehmann et al (2012), Aikman et al (2015) and Juselius and Drehmann (2015). This section draws on Claessens et al (2009, 2011, 2012a) which provide detailed empirical analyses of the interactions between business and financial cycles.

49 An alternative methodology would be to consider how economic activity fluctuates around a trend and then to identify a “growth cycle” as a deviation from this trend (Stock and Watson (1999)). While several studies have use detrended series (and their second moments, such as volatility and correlation) to study the various aspects of cycles, it is well known that the results of these studies have depended on the choice of detrending methodology (Canova (1998)). The advantage of turning points identified by using the classical methodology is that they are robust to the inclusion of newly available data. In other methodologies, the addition of new data can affect the estimated trend and thus the identification of a growth cycle. Fatas and Mihov (2013) analyse different approaches for the dating of recoveries using US data. See also Ng and Wright (2013) for a survey of business cycles facts and methodologies.

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