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Working Paper No. 576 | September 2009

A Financial Sector Balance Approach and the Cyclical Dynamics of the US Economy

This paper investigates the relationship between asset markets and business cycles with regard to the US economy. We consider the Goldman Sachs approach (2003) developed to study the dynamics of financial balances.

By means of a small econometric model we 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 help 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. The last results appear innovative with respect to Goldman Sachs’s findings. Furthermore, our econometric results are robust and quite stable.

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Author(s):
Paolo Casadio Antonio Paradiso
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