The role of the central bank in credit and business cycle movements: Evidence from Fiji

Abstract

This study attempts to investigate the co-movements between the business and credit cycles and examines the role of the central bank in stabilizing these cycles in the case of Fiji. For estimation purposes, we utilized the concordance index, dynamic conditional correlation, and a Generalized Linear Model for the sample period from 1992Q1 to 2023Q4. The study finds that, according to the concordance index, both the credit cycle and business cycle moved in the same direction 64% of the time. From the perspective of dynamic conditional correlation, we observe that from 1992 to 2003, the credit and business cycles were positively correlated. However, from 2003 to 2007, the correlation between the two cycles was negative. Moreover, post-COVID-19, both cycles exhibit a positive correlation. Findings form the regression shows that the credit cycle positively affects the business cycle; however, the interest rate is found to have a weak transmission effect on the business cycle. Global GDP has a positive effect on Fiji's credit cycle but exhibits a negative effect on the business cycle.