The globalization of finance and increased international linkages between national money and capital markets have focused attention on the potential role of international financial cycles as a cause of fluctuations in national asset prices and in heightened risks of financial instability. A financial cycle captures systematic patterns in the financial system that can have important macroeconomic consequences and is closely related to the concept of systemic risk in the financial system. Both across countries and over long periods of time, regular financial cycles are clearly identifiable, are distinct from the business cycle in their frequency and amplitude, typically presage banking crises and play an important role in the current policy debate on how to increase the resilience of the financial system. Despite all of these stylized facts, we are still far from understanding the properties of the financial cycle comparable to our knowledge of the features of the business cycle. This course will therefore review the evidence on the patterns of financial cycles, discuss their causes and consequences, and examine possible policy responses.
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