Testing for causality between credit and real business cycles in the frequency domain: an illustration

Abstract

We estimate credit and GDP cycles for three Latin American economies and study their relation in the frequency domain. We compute coherence statistics between credit and GDP cycles and find that the highest correlations between these two cycles are obtained in medium-term frequencies. Spectral cross-correlations suggest a positive relation among lags in credit cycles and contemporaneous GDP cycles. Furthermore, this relation is higher approximately at medium-term frequencies. We perform frequency-domain Granger-type causality tests and find evidence of causality running from credit cycles to GDP cycles in all three economies.

Keywords:

• frequency domain
• Granger causality
• credit booms and crunches
• recession

JEL Classification:

• E32
• E44
• C32