Determinants and Transmission Channels of Financial Cycle Synchronization in EU Member States

This paper investigates the determinants and transmission channels underlying the synchronization between financial and business cycles across European Union (EU) member states. For the empirical approach, we combine frequency-domain filtering techniques with spillover index analysis to track cross-country macro-financial interlinkages. We measure financial cycle correlations and spillovers in terms of common exposures to trade linkages, overlapping systemic risk episodes, and bilateral financial claims. An important finding is that financial and business cycles tend to move together, largely due to shared macro-financial conditions and systemic stress episodes. While the data reveal strong co-movement between these cycles, the analysis does not imply a specific direction of causality. In particular, it remains possible that shifts in financial conditions can amplify or even precede business-cycle fluctuations, as seen during major crises. The focus of this study is, therefore, on the interdependence and synchronization of these cycles rather than on causal sequencing. The analysis combines complementary filtering and variance-decomposition methods to quantify the interdependencies shaping EU financial stability, providing a basis for enhanced macroprudential policy coordination. The policy implications for macroprudential authorities entail taking into account cross-border effects and spillovers when implementing instruments for taming the financial cycle.