A Financial Sector Balance Approach And The Cyclical Dynamics Of The U.S. Economy

Date Added: Sep 2009
Format: PDF

This paper investigates the relationship between asset markets and business cycles with regard to the U.S. economy. The authors consider the Goldman Sachs approach (2003) developed to study the dynamics of financial balances. By means of a small econometric model they find that asset market dynamics are fundamental to determining the long-run financial sector balance dynamics. The gap between long-run equilibrium values and the actual values of the financial balances helps to explain the cyclical path of the economy. Among all financial sectors balances, the financing gap in the corporate sector shows a leading effect on business cycles, in a Minskyan spirit.