1990s and 2008–09 – and often coincided with global shocks, such as increases in oil prices and interest rates (Figure 12). Such synchronised recessions tend to be deeper than other types of recession.

## Financial cycles

Financial cycles are often longer and more pronounced than business cycles, with financial downturns particularly deeper and longer than recessions. Downturns (upturns) of financial cycles tend to be longer than recessions (recoveries) (Figures 13 and 14). Episodes of house price downturns, in contrast, persist for about eight quarters and other financial downturns last around six quarters. A typical financial downturn corresponds to about a 6% decline in credit, 6%–7% fall in house prices and 30% decline in equity prices. Upturns are often longer than downturns, with the strength of upturns to differ across financial markets. Equity price upturns are the sharpest, some 26%. Financial cycles are also more intense than business cycles, ie financial variables adjust much more quickly than real ones, as shown by their slope coefficient. These findings are consistent with various studies documenting that asset prices are more volatile than economic fundamentals (see Shiller (1981, 2003) and Campbell (2003)).

The main features of financial downturns vary across EMEs and advanced economies. While not necessarily longer, financial downturns in EMEs are much sharper than in advanced countries. Credit contractions last about the same in both groups but are one-third deeper in EMEs. Equity downturns last as long in both groups but upturns are much shorter in EMEs. Comparisons between mean and medians show that the distributions of duration and amplitude of the phases of financial cycles are also more skewed to the right in EMEs than in advanced economies. These differences indicate that factors possibly related to the presence of financial frictions could affect financial cycles.

Financial cycles also tend to feed off of each other and become amplified. The likelihood of a credit downturn (or upturn) taking place goes up substantially if there is also a disruption (or boom) in house prices. There are also strong interactions between financial cycles. Credit downturns that overlap with house price busts tend to be longer and deeper than other credit downturns. Similarly, a typical credit upturn becomes 30% longer and twice as large when it coincides with a housing boom. This suggests that feedback effects play a role as disruptions in one market aggravate the problems in another, probably because of collateral constraints and complementarities between credit and housing finance. Moreover, globally synchronised financial downturns are often longer and deeper, especially for credit and equity markets. During highly synchronised equity market downturns, for example, prices drop by about 30% compared with some 18% for other downturns.

# B. Linkages between business and financial cycles

Recent research using cross-country data has revealed important links between business and financial cycles. Claessens et al (2012a) use a comprehensive database for a large sample of advanced economies and EMEs over a long period of time to provide a broad empirical characterisation of macro-financial linkages. They report three main results. First, business cycles are more closely synchronised with credit and house price cycles than with equity price cycles. Second, financial cycles appear to play an important role in determining recessions and recoveries and shaping the features of business cycles more generally. In particular, recessions are more likely to coincide with financial disruptions while recoveries are more likely to be associated with booms. Third, recessions associated with some forms of financial disruption, 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 34