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Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens

across different phases of financial cycles?” In addressing this question, we also analyze the behavior of the major macroeconomic and financial variables over business and financial cycles. Our key finding is that interactions between business and financial cycles play an important role in shaping recessions and recoveries. Specifically, recessions associated with financial disruption episodes, notably house price busts, are often longer and deeper than other recessions. Conversely, recoveries associated with rapid growth of credit and house prices tend to be more

Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens
This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.
International Monetary Fund. European Dept.
This report examines the experiences of four European countries that have had large house-price declines in recent years. In particular, it examines the experiences of Denmark, Ireland, the Netherlands, and Spain—four countries in which the house-price cycle has been especially large and that share a similar institutional environment (a common monetary policy and the EU’s institutional framework)—with a view to exploring how policies can best support economic recovery in the wake of a house-price bust. The paper draws on and synthesizes related Selected Issues papers that are being or have been drafted as part of the 2014 Article IV consultations with these countries. These countries’ experiences share similarities, but also important differences. Shocks to house prices, unemployment, and bank balance sheets were most severe in Ireland and Spain, reflecting in part a higher amplitude of residential construction. However, the boom- bust cycle has, together with other shocks, left all four countries facing significant output gaps, as well as elevated levels of private-sector debt that pose headwinds for growth. Promoting recovery following a house-price bust requires a multi-pronged strategy. Large house-price busts can leave countries facing wide output gaps, a highly indebted private sector, and weaker bank balance sheets. Addressing these problems simultaneously can be challenging, as efforts often involve trade-offs (e.g., faster deleveraging can widen output gaps). A careful and multi-pronged strategy is thus required to minimize trade-offs and accelerate sustainable recovery. Important progress has been made in this regard in all four countries.
International Monetary Fund. European Dept.

and adverse balance sheet shocks also affected these countries’ banks. The shocks were most severe in Ireland and Spain, where relatively more overbuilding during the boom led to larger house price declines, higher spikes in unemployment, and bigger drops in construction activity. These forces in turn prompted a larger rise in nonperforming loans in Ireland and Spain, especially on loans to construction companies. Mortgage arrears also rose to very high levels in Ireland, where the house-price bust was most severe and the increase in arrears was linked to falling