Istituto di Economia Internazionale - Financial Cycles and Monetary Policy

Recent Articles

Read more about our latest published articles.

Review’s Archive

Corresponding Author:
Elena Seghezza, Department of Political Science, University of Genoa, Italy

Financial Cycles and Monetary Policy

Volume 79 - Issue 1, February 2026
(pp. 27-36)
JEL classification: E30; E44; E50; G20 Doi: 10.65644/EIIE.079.01.0027
Keywords: Financial Cycles; Global Financial Crisis; Monetary Policy

Abstract

Before the Global Financial Crisis, in both the dominant view and the econometric models used by central banks, finance was considered as being peripheral to the macroeconomic cycle. Borio and other scholars working at the Bank for International Settlements (BIS) made a major contribution to the theory of financial crises by highlighting how a financial cycle can impact on real variables. In particular, when a financial cycle overlaps with an expansive real cycle, banks may underestimate credit risk leading to a real estate and/or financial bubble that in the end may result in a financial crisis. The importance given by Borio to the financial cycle led him to suggest that monetary policy should support macroprudential policies aimed at ensuring financial stability.

Read the full article

Download the article in PDF format to read and print.

Bibliography

Bernanke, B. (2005), “The Global Saving Glut and the U.S. Current Account Deficit”, Speech 77, Board of Governors of the Federal Reserve System.

Bernanke, B., C. Bertaut, L.P. De Marco, and S. Kamin (2011), “International Capital Flows and the Return to Safe Assets in the United States, 2003-2007”, Banque de France Financial Stability Review, 5, 13-26 February, https://doi.org/10.2139/ssrn.1837780

Bordo, C. and J. Landon-Lane, (2013), “Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence”, NBER Working Paper No. 19585,

https://doi.org/10.3386/w19585

Borio, C. (2014a), “The Financial Cycle and Macroeconomics: What have we Learnt?”, Journal of Banking and Finance, 45, 182-198, https://doi.org/10.1016/j.jbankfin.2013.07.031

Borio, C. (2014b), Central Banking Post-Crisis: What Compass for Uncharted Waters?, in: C. Goodhart, D. Gabor, J. Vestergaard, I. Ertürk (Eds), “Central Banking at a Crossroads: Europe and beyond”, Anthem Press: London.

Borio, C. (2024), “Whither Inflation Targeting as a Global Monetary Standard?”, OMFIF Lecture, London, 13 November 2024. Also available as BIS Working Papers No. 1230, December.

Borio, C. and P. Disyatat (2009), “Unconventional Monetary Policies: An Appraisal”, BIS Working Paper No. 292, https://doi.org/10.2139/ssrn.1541243

Borio, C. and P. Disyatat (2011), “Global Imbalances and the Financial Crisis: Link or no Link?”, BIS Working Paper No. 346, https://doi.org/10.2139/ssrn.1859410

Borio, C. and P. Disyatat (2015), “Capital Flows and the Current Account: Taking Financing (more) Seriously”, BIS Working Paper no. 525.

Borio, C. and P. Lowe (2002), “Asset Prices, Financial and Monetary Stability: Exploring the Nexus”, BIS Papers No. 114, July, https://doi.org/10.2139/ssrn.846305

Borio, C. and P. Lowe (2004), “Securing Sustainable Price Stability: Should Credit Come back from the Wilderness?”, BIS Working Paper No. 157, https://doi.org/10.2139/ssrn.782324

Borio, C. and W. White (2004), “Whither Monetary and Financial Stability? The Implications of Evolving Policy Regimes”, BIS Working Papers No. 147, https://doi.org/10.2139/ssrn.901387

Borio, C. and H. Zhu (2008), “Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?”, BIS Working Paper No. 268, https://doi.org/10.2139/ssrn.1334132

Caballero, R-J., E. Farhi and P-O. Gourinchas (2008), “An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates”, American Economic Review, 98(1), 358-393, https://doi.org/10.1257/aer.98.1.358

Drehmann, M., C. Borio and K. Tsatsaronis (2012), “Characterizing the Financial Cycle: Don’t Lose Sight of the Medium Term”, BIS Working Paper No. 380.

Jakab, Z. and M. Kumhof (2015), “Banks are not Intermediaries of Loanable Funds - and why this Matters”, Bank of England Working Paper No. 529, https://doi.org/10.2139/ssrn.2612050

Johnson, K.H. (2009), “Gross or Net International Financial Flows”, Center for Geoeconomic Studies, Council on Foreign Relations Working Paper, July.

Juselius, M., C. Borio, P. Disyatat and M. Drehmann (2016), “Monetary Policy, The Financial Cycle and Ultra-Low Interest Rates”, BIS Working Paper No. 569, https://doi.org/10.2139/ssrn.2823454

Kaldor, N. (1989), Further Essays on Economic Theory and Policy, Duckworth: London.

Keynes, J.M. (1933), A Monetary Theory of Production, in: G. Clausing (Ed.), “Der Stand und die nächste Zukunft der Konjunkturforshung: Festschrift für Arthur Spiethoff”, Duncker & Humboldt: Munich. Republished in: D. Moggridge (Ed.), “Collected Writings of John Maynard Keynes, vol. XIII – The General Theory and After, Part I – Presentation” (1973), MacMillan: London.

McLeay, M., A. Radia and R. Thomas (2014), “Money Creation in the Modern Economy”, Bank of England, Quarterly Bulletin, Q1, March 14.

Mendoza, E-G., V. Quadrini and J-V. Rios-Rull (2007), “Financial Integration, Financial Deepness, and Global Imbalances”, NBER Working Paper No. 12909, https://doi.org/10.3386/w12909

Moore, B. (1988), Horizontalists and Verticalists: The Macroeconomics of Credit Market, Cambridge University Press: Cambridge.

Wicksell, J. (1898), Geldzins und Güterpreise, English version: Interest and Prices (1936), MacMillan: London.

Authors’ login