| Since the global financial crisis of 2007-2008,despite the major central banks' adoption of extremely accommodative monetary policies and proactive fiscal policies of the government,the 2% inflation target of advanced economies has rarely been achieved.Even in China,inflation is relatively low.In the past few years,the monetary policies of the major central banks have diverged.The United States first started raising interest rates in 2015,and the United Kingdom also started in 2017.However,Japan and Germany remained unchanged.In the process,China has remained relatively independent.As the Chinese economy has been in decline in recent years,it has not followed the pace of US rate hikes.It is worth noting that in this round of interest rate hikes in the United States since 2015,the inflation was not achieving the target.What is the reason? At the same time,what is the reason for the prosperity of the financial market,the inflation has been sluggish,and the unemployment rate has been declining? After the financial crisis,the debt leverage of governments in various countries has been rising.What is the impact of rising government leverage on inflation and unemployment? What are the main drivers behind this?This paper mainly analyzes the impact of the financial cycle on the fluctuations of major macro variables from the perspective of the financial cycle.The macro variables include real GDP,inflation,unemployment rate,and government debt leverage.The methods mainly use wavelet analysis methods,including wavelet power spectrum,partial wavelet phase difference,and partial wavelet gain.In terms of data processing,as this article focuses on the financial cycle,and the medium-term length of the financial cycle is 8-32 years,in order to capture the impact of the financial cycle and other macro financial variables on the medum-term cycle,data for advanced economies such as the United States using wavelet decomposition method,it is decomposed into 6 levels,including the detailed parts of the first to sixth levels and the approximate part of the sixth level,or called a long-term trend.After removing the long-term trend from the original time series,the fluctuation component of the series is obtained and retained information under 32 years.And because the sample length of China's data is relatively short,and the fluctuations are mainly concentrated in the 2-8year,the Chinese macro data is decomposited into 4 levels,and the components ofmore than 8 years are removed to obtain fluctuations component within 8 years.The HP filtering method gives the same result for the quarterly data with a smoothing factor of 1600.In the method estimation,the GMM method,VAR model and wavelet method are mainly used.The GMM estimation analyzes the overall relationship between financial cycle,monetary policy,business cycle,unemployment rates,and inflation;the VAR model can analyze the dynamic response mechanism between financial cycles,interest rates,business cycle,and unemployment rates;finally,using the wavelet method estimates the dynamic relationship between financial cycles and macro variables in different cycles and different periods.The main findings are as follows:First,by measuring the length of financial variables in the United States,Japan,Germany,the United Kingdom,and China,it is found that compared with developed economies such as the United States,the length of financial cycle and financial variables in China is relatively short,mainly concentrated in the traditional business cycle of 2-8 years.In terms of length of the financial cycle constructed by principal component analysis is also 2-8 years.Specifically,it is about 3 years.The financial cycles in the United States,Japan,Germany,and the United Kingdom are relatively longer,with fluctuations mainly concentrated in the medium-term cycle.Second,from the perspective of the financial and business cycles of developed economies such as the United States,rather than the traditional business cycle,the business and financial cycles is nearly synchronized,and the business cycle is leading of the financial cycle.This relationship is very important.On the one hand,in explaining the overall changes in GDP,the fluctuations of the medium-term accompanying frequency(8-32 years)are more important than the traditional business cycle(2-8 years).On the other hand,the traditional business cycle ignores larger and more important fluctuations,and the financial cycle can be explained in this regard.China's financial cycle and business cycle also show synchronicity.Unlike the United States and other countries,the financial cycle is leading the business cycle.The impact of the financial cycle on China's business cycle is even more important.In recent years,China's economy has mainly faced the prevention of systemic financial risks in China.It has adopted deleveraging and strict control of housing prices.The financial cycle has declined,and the economy has also declined.Third,for developed economies,the financial cycle has been longer since the mid-to-late 1980 s,especially in the United States.The main reason may be that,firstof all,the liberalization of financial markets began in the mid-1980 s.Secondly,the normality of central banks,which focus on inflation,is to dilute the role of monetary and credit aggregates.This is very dangerous.If inflation is kept low,the central bank will not have the incentive to adjust monetary policy,which will increase the expansion of the financial cycle.Finally,since the 1990 s,with the internationalization of commodity markets and technological progress,global supply has been promoted,leading to low inflation.Low policy interest rates or real interest rates are less than zero most of the time,which may lead to further expansion of financial cycle and the accumulation of financial risks.It is the reversal of the financial cycle that has led to the onset of economic recession.At the same time,this paper uses wavelet decomposition to extract the medium-term components from the financial cycle to predict the economic recession,and finds that the results obtained are better than the performance of the financial cycle constructed using BP filter.Compared with the prediction of the term spread,this paper does not find that the financial cycle's forecast of the economic recession is better than the performance of the term spread in less than one year,but the forecast of the financial cycle over two years is better,and the forecast of the term spread is better in the short term.Therefore,the combination of the two will improve the prediction accuracy.of economic recession.Fourth,from around 2009 in the United States and other advanced economies,with the implementation of a series of easy monetary policies by the central bank and proactive fiscal policies,the unemployment rate began to decline.In particular,the United States hit its lowest level in nearly 50 years.Germany has also hit an unemployment rate for almost 30 years.But inflation has not reached the 2% target.Empirical results show that the financial cycle has a negative reaction to the unemployment rate.As the financial cycle expands,the unemployment rate decreases.When the financial cycle reverses,it often triggers an economic recession and causes the unemployment rate to rise.At the same time,during the financial boom,residents and businesses increased leverage,and the increase in household credit was not used for consumption,but for buying houses or financial assets.Rising of financial asset prices will increase wealth,but this will further widen the gap between rich and poor.Because high income earners have lower marginal consumption,inflation may remainlow despite financial prosperity.And one might think that the traditional Phillips curve has died or disappeared.From the empirical results,the impact of the financial cycle on the unemployment rate in developed countries is different.Theimpact of the financial cycle of the United States and Japan on the unemployment rate is greater,while that of Germany and Japan is relatively small,mainly due to the impact of the business cycle.Fifth,for the United States,monetary policy has quietly changed.Starting from the fourth quarter of 2015,although inflation did not meet the Fed's goal,it still started the rate hike cycle.In fact,the US financial market experienced a boom of nearly 10 years since 2009,and both the stock market and the real estate market exceeded levels before the 2008 financial crisis.Empirical resultss show that from the perspective of the medium-term cycle,the financial cycle,before 2001,the impact on interest rates continued to decline.But after the Internet bubble in 2001,although the financial cycle has not received a big shock,since 2001,the response of interest rates to the financial cycle has gradually strengthened.The impact of the financial cycle on monetary policy is gradually increasing.At the same time,the impact of inflation on interest rates has gradually weakened.Sixth,after the global financial crisis,governments in various countries have successively increased leverage for economic recovery,including China.Unlike developed economies such as the United States,after the financial crisis,Chinese residents and businesses have increased leverage,while developed economies such as the United States have delevered.Similarly,the government has increased leverage.From the medium cycle(16-32 years),the US government debt leverage ratio and the financial cycle are positive,and the financial cycle leads the government debt leverage ratio.This shows that at lower frequencies in the medium and long term,as the financial cycle rises,the government is also increasing leverage.This phenomenon also appeared in China.From 1999 to 2013,while residents and enterprises increased leverage,the government also increased leverage.After 2016,due to China's macroeconomic policy regulation,corporate deleveraging,especially state-owned enterprise deleveraging,and the regulation of the real estate market,the debt leverage ratio of residents and enterprises has declined.As China's financial cycle is ahead of the economic cycle,as the financial cycle declines,the economy also declines.At the same time,the government has adopted an active fiscal policy to stabilize the overallmacro-leverage,and the government debt leverage has risen.The government's leverage has been increasing,and part of the factor is passively increasing leverage,because China's real GDP has fallen since 2012 and has continued to the present.Seventh,the US government debt leverage ratio and unemployment rate have a high positive correlation in the medium-term cycle,and the relationship with inflation is relatively weak.This shows that the government is mainly concerned about the unemployment rate,and as the unemployment rate rises,it increases government spending and promotes employment.As employment improves,fiscal stimulus will also be withdrawn from time to time.Seventh,from the Granger causality test of the VAR model,it is found that for the United States,there is a two-way Granger causality between financial cycles and business cycles,and between interest rates and unemployment rates.At the same time,interest rate has a one-way Granger causality for financial cycle and business cycle.Financial cycles and business cycles also have a one-way Granger causality to unemployment.For Japan,the financial cycle and business cycle also have a two-way Granger causality.At the same time,the financial cycle and interest rate and the economic cycle and unemployment rate have the same two-way relationship.In addition,interest rates have a one-way Granger causality between unemployment and unemployment..For Germany,financial cycle and interest rates and business cycle and interest rate have a two-way Granger causality.Interest rates and business cycles have a one-way Granger causality for unemployment.In addition,financial cycle has a one-way Granger Over the relationship,and the reverse is not significant.For the United Kingdom,there is a two-way Granger causality between financial and economic cycles,interest rates and business cycles,and interest rates and unemployment.In addition,the financial cycle has a one-way Granger causality between unemployment and interest rates and economic cycles.Among them,in Japan and Germany,the financial cycle does not directly affect the unemployment rate.It can only affect the unemployment rate through the transmission of interest rates or the economic cycle.The Granger causality between the Japanese interest rate and the economic cycle is not significant,and it can be indirect through the transmission of the financial cycle Impact,the British Granger causality between the economic cycle and the unemployment rate is also not significant,and the financial cycle also plays a bridge role here,through the transmission of the financial cycle to achieve the impactof the economic cycle on the unemployment rate.It can be seen that the financial cycle plays a key role in it.Finally,from the empirical results obtained in this article,the following policy recommendations are given,First,adjust traditional monetary policy and include the financial cycle as an important factor in the central bank's monetary policy framework.Second,in order to maintain financial stability,we need to take a macro view of the leverage levels of financial institutions and financial markets and take anti-cyclic adjustment.Introduce macro-prudential policies to prevent systemic financial risks.Third,when the financial cycle is down,proactive fiscal policies should be adopted to hedge against the impact of further economic downturns caused by corporate deleveraging.Therefore,due to the importance of the financial cycle in the overall macro economy,how to tame the financial cycle requires corresponding adjustments to the existing monetary policy,and it is a major trend to incorporate the financial cycle into the monetary policy framework.At the same time,improving the macro-prudential policy framework and cooperating with monetary policy can better combine price stability and financial stability. |
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