Time-Varying Correlation between Business Cycle and Financial Cycle in India

Abstract: The study examines time-varying correlation between business cycle and financial cycle using the DCC-GARCH model for India during the time period January, 2003 to March, 2020. The result of the DCC-GARCH model demonstrates that the time-varying correlation between aforementioned two cycles can be broadly distinguished in three phases. Dynamic correlation between both cycles remains mostly positive with varying degree and exhibits tendency of increase in all phases. The authors believe that an FCI is more effective than a single financial indicator in the central bank's policy decision.

Keywords: DCC-GARCH, Business Cycle, Financial Cycle

JEL Classification Number: C32, E32