2. Nexus Between Financial Cycle and Business Cycle in India

The present paper attempts to explore the possible interdependence between business cycle and financial cycle in India during 1996Q1–2018Q3. Quarterly data of macroeconomic variables, namely real GDP, credit to GDP ratio, real house prices, real equity prices and real effective exchange rate have been used for the analysis. The cyclical components of the variables are generated by the frequency filter technique of Christiano–Fitzgerald. The identification of peaks and troughs has been done using turning point analysis of Bry and Boschan (National Bureau of Economic Research 1971). Degree of co-movement between two cycles is found by Harding and Pagan (Journal of Monetary Economics, 49(2):365–381 2002) technique. To explore the long-run relation between the business cycle and financial cycle, spectral Granger causality test (Breitung and Candelon) has been conducted. The empirical finding reveals that the cyclical component of financial variable Granger causes the cyclical component of the gross domestic product in the medium as well as long runs and vice versa.