Global Financial Risk Thresholds and Business Cycle Fluctuations: A Dynamic Heterogeneity Model Approach

Abstract

ABSTRACT This study constructs a dynamic heterogeneity threshold model using unbalanced panel data from 146 countries/regions (1984–2017). The findings show that (1) financial risk has a non-linear effect on business cycle fluctuations and a significant global financial risk threshold effect; (2) the threshold of financial risk is significantly lower in emerging market economies than in developed and latecomer market economies; (3) in the long-run, regardless of the threshold effect, once financial risk expands, it will exacerbate business cycle fluctuations; and (4) the threshold effect of different potential financial risks on business cycle fluctuations is heterogeneous.