The classical dating methodology distinguishes three phases of cycles: recessions, expansions and recoveries. It assumes that a recession begins just after the economy reaches a peak and ends as it reaches a trough. An expansion begins just after a trough and ends at the next peak. A complete business cycle has two phases, recession (from peak to trough) and expansion (from trough to peak). Together with these two phases, recoveries from recessions have been studied. The recovery phase is the early part of an expansion and is usually defined as the time it takes for output to return from its lowest point to the level it reached just before the decline began. An alternative definition considers the increase in output four quarters after the trough. Given the complementary nature of these two definitions of the recovery phase, both of them are used here.

Financial cycles are identified by employing the same methodology. However, different terms are used to describe them: the recovery phase is called an “upturn” and the contraction a “downturn”. These two phases provide rather well defined time windows for considering the evolution of financial cycles. In what follows, we study the main features of business and financial cycles, considering, in particular, their duration, amplitude and synchronisation.<sup>50</sup>

# Business cycles

Recessions can be long, deep and costly. A typical recession lasts close to four quarters while a recovery last about five quarters (Figure 11).<sup>51</sup> The typical decline in output from peak to trough, the recession’s amplitude, is about 3% for the full sample and the typical cumulative output loss amounts to about 5%. The amplitude of a recovery, defined as the increase in the first four quarters following the trough, is typically about 4%. Although most recessions (recoveries) are associated with moderate declines (increases) in output, there can be much larger changes in activity as well.

Business cycles in EMEs are more pronounced than those in advanced economies. In particular, the median decline in output during recessions is much larger in EMEs (4.9%) than in advanced economies (2.2%) and recoveries in EMEs are twice as strong as those in advanced countries. In terms of cumulative loss, recessions in EMEs are almost three times more costly than those in advanced economies. These findings suggest that macroeconomic developments, policy factors and institutional characteristics, including possibly the degree of financial frictions, potentially affect the evolution of business cycles in different countries.

Business cycles are highly synchronised across countries. For some observers, the global nature of the GFC, during which many economies experienced a recession at the same time, was surprising. However, this is not so unusual because recessions and recoveries are often synchronised across countries. Recessions in many advanced economies, for example, were concentrated in four periods over the past 40 years – the mid-1970s, the early 1980s, the early

> 50 The results reported in this section are based on a large database that comprises a total of 44 countries: 21 advanced OECD economies and 23 EMEs. For the former group, the data coverage ranges from Q1 1960 to Q4 2010 while for the latter it ranges from Q1 1978 to Q4 2010 (because quarterly data series are less consistently available prior to 1978). In order to study business cycles, GDP is used because that variable is the best available measure of economic activity. Financial cycles are studied considering three distinct but interdependent market segments: credit, housing and equity. See further Claessens et al (2012a).

> 51 Claessens et al (2012a) identify 243 recessions and 245 recoveries. The number of recessions and recoveries differs slightly because of the timing of events. There are 804 complete financial cycles over the period Q1 1960 to Q4 2010. The sample features 253 downturns in credit, 183 in house prices and 443 in equity prices; and 220, 155 and 429 upturns in credit, house and equity prices, respectively. Since equity prices are more volatile than credit and house prices, they feature naturally more often in downturns and upturns than the other financial variables.

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