Business and Financial Cycles in Romania: An Empirical Investigation

In this paper we study the relationship between business and financial cycles in Romania, highlighting their distinct characteristics and interactions. The global financial crisis highlighted the role of financial factors in shaping macroeconomic dynamics, especially in developing countries which are more vulnerable to foreign credit reversals. While the business cycle is well-defined, financial cycles are less “standardized” because of their longer duration and greater amplitude. Using quarterly data from 2005 to 2024, this study applies turning-point analysis, band-pass filtering, and finance-neutral output-gap estimation to highlight the key traits of Romania’s business and financial cycles. The results show these cycles rarely align, though GDP and real house prices move together more closely than credit measures. Real credit and property prices prove to shape the output gap significantly: booms in credit and housing push standard methods to overstate potential output, while financial contractions deepen downturns beyond what trend filters suggest. These insights underscore the value of weaving financial-cycle signals into macroeconomic analysis and help illuminate the unique dynamics of emerging economies.