There is no consensus on the definition of the financial cycle. In what follows, the term will denote self-reinforcing interactions between perceptions of value and risk, attitudes towards risk and financing constraints, which translate into booms followed by busts. These interactions can amplify economic fluctuations and possibly lead to serious financial distress and economic dislocations. This analytical definition is closely tied to the increasingly popular concept of the “procyclicality” of the financial system (eg, Borio et al (2001), Danielsson et al (2004), Kashyap and Stein (2004), Brunnermeier et al (2009), Adrian and Shin (2010)). It is designed to be the.
