The impact of risk cycles on business cycles: a historical view

Danielsson, Jon ORCID: 0009-0006-9844-7960, Valenzuela, Marcela and Zer, Ilknur (2022) The impact of risk cycles on business cycles: a historical view. Review of Financial Studies, 36 (7). 2922 - 2961. ISSN 0893-9454

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Abstract

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 about 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.

Item Type:	Article
Official URL:	https://academic.oup.com/rfs
Additional Information:	© 2022 The Author(s).
Divisions:	Finance Systemic Risk Centre
Subjects:	H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions
JEL classification:	F - International Economics > F3 - International Finance > F30 - General G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation N - Economic History > N1 - Macroeconomics and Monetary Economics; Growth and Fluctuations > N10 - General, International, or Comparative N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative
Date Deposited:	21 Nov 2022 12:09
Last Modified:	12 Dec 2024 03:25
URI:	http://eprints.lse.ac.uk/id/eprint/117384

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