Is Finance a Veil? Lead‐And‐Lag Relationship between Financial and Business Cycles: The Case of China

35 Pages Posted: 19 May 2020

See all articles by Chung-Hua Shen

Chung-Hua Shen

National Taiwan University - Department of Finance

JunGuo Shi

Hunan University

Meng-Wen Wu

National Taipei University - Department of Business Administration

Date Written: September 2019

Abstract

This study examines the lead‐and‐lag relationship between financial cycles (FCs) and business cycles (BCs) by using Chinese provincial data. We construct FCs of the financial sector on the basis of three financial variables: credit‐to‐GDP (gross domestic product) ratios, house prices, and equity prices. We use the panel dynamic logit model to investigate the lead‐and‐lag effect between two sectors. Results show that each province has its own unique FCs and BCs. Hence, financial policies should be different in dissimilar provinces. Next, we find that FCs lead BCs and not vice versa. Furthermore, the leading effect is stronger in rich provinces than in poor areas.

Keywords: business cycle, credit‐to‐GDP ratio, direct financing ratio, financial cycle, panel dynamic logit model

Suggested Citation

Shen, Chung-Hua and Shi, JunGuo and Wu, Meng-Wen, Is Finance a Veil? Lead‐And‐Lag Relationship between Financial and Business Cycles: The Case of China (September 2019). European Financial Management, Vol. 25, Issue 4, pp. 978-1012, 2019, Available at SSRN: https://ssrn.com/abstract=3600268 or http://dx.doi.org/10.1111/eufm.12193

Chung-Hua Shen (Contact Author)

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

JunGuo Shi

Hunan University

Meng-Wen Wu

National Taipei University - Department of Business Administration ( email )

151 University Rd., San Shia District,
New Taipei City,, 23741
Taiwan

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