THE SYNCHRONIZATION OR DUALITY OF THE BUSINESS AND FINANCIAL CYCLES IN SMALL DEPENDENT ECONOMIES: EMPIRICAL LESSONS FROM LESOTHO

Abstract: The aim of this paper is to identify the synchronization between business and financial cycles in Lesotho. When business and financial cycles are in sync, monetary policy and macro-prudential policy conduct are complementary; however, when the cycles are out of sync, the two policies conflict. This study investigates the synchronization between business and financial cycles. Therefore, this study seeks to address the key research question: Are business and financial cycles synchronized in Lesotho? Real GDP growth rates and credit-to-GDP gaps are employed to extract business and financial cycles, respectively. The data engaged spans from 1976 to 2019, and in an effort to estimate the synchronization level, the concordance index was employed. The findings suggest that business and financial cycles in Lesotho are not synchronized consequently; the key recommendation is that the Central Bank of Lesotho should adopt macro-prudential policy to reinforce application of monetary policy. The Financial Stability Committee should be established within the Central Bank of Lesotho, which complements the Monetary Policy Committee by focusing on financial stability while preserving the independence of monetary policy in maintaining price stability.