Investigating the Impact of Iran-Germany Business Cycle Synchronization on the Friction and Depth of Financial Markets in Iran (Markov Switching Bayesian VAR Method)

Document Type : Research Paper


1 Ph.D. Candidate in Economy, Faculty of Management and Economic, Islamic Azad University, Kerman, Iran

2 Prof. in Economic, Faculty of Management and Economic, Shahid Bahonar University, Kerman, Iran

3 Assistant Prof. in Economic, Faculty of Management and Economic, Islamic Azad University, Kerman Branch, Iran


The synchronization of business cycles is one of the latest issues that has been raised recently in the field of international trade as economic integration between countries has increased. Accordingly, considering the impact of the flow of business cycles on the economy of Iran and the process of integration of domestic market with the international financial markets, it is important to determine the impact of their business cycles synchronization and the effect of synchronization on the friction of financial markets and the financial depth. Due to the formation of business cycles and the process of friction and financial depth, the Switching Bayesian VAR (MSBVAR) method was used. The results showed that the synchronization of trade cycles between Iran and Germany during the 1985-2015 indicates the high coincidence and symmetry between the two business cycles. It was also found that the financial friction plays a significant role in justifying the degree of synchronization of business cycles during global financial crises. The regime 1 (the recession) has been more stable than the regime 2 (inflation) and it is highly probable to remain within the regime 1.


Main Subjects

Akin, C. (2006). Multiple Determinants of Business Cycle Synchronization. Paper Presented at the 2006 Annual Meeting of the Canadian Economic Association, Montreal. Available at SSRN: 1022648.
Allegret, J. P., & Essaadi, E. (2011). Business Cycles Synchronization in East Asian Economy: Evidences from Time-varying Coherence Study. Economic Modeling, 28(1-2), 351-365.
Billio, M., Casarin, R., Herman, K., Dijk, V., Mazzi, G., Ravazzolo, F. (2011). Turning point detection with bayesian panel Markov-Switching VAR. Statisticalworking papers Eurostat.
Burns, A. & Mitchell, W. (1946). Measuring Business Cycles. NBER Paper, NY.
Calderón, C., & Chong, A., & Stein, E. (2002). Trade Intensity and Business Cycle Synchronization: Are Developing Countries any Different? Central Bank of Chile Working Paper, No. 195.
Chib, S. (1996). Calculating Posterior Distributions and Model Estimated in Markov Mixture Models. Journal of Econometrics, 75(1), 79-97.
Choe, J. (2001). An Impact of Economic Integration through Trade: on Business cycle for 10 East Asian Countries. Journal of Asian Economics, 12(4), 569-586.
Farzin Wash, A, Ehsani, M, Keshavarz, E. (2015). Financial shocks and labor market volatility with financial friction. Iranian Economic Studies Journal, 50 (2), 415- 447. (in Persian)
Frankel, J. A. & Rose, A. K. (1998). The Endogeneity of the Optimum Currency Area Criteria. The Economic Journal, 108(449), 1009-1025.
Goldsmith, R. W. (1969). Financial Structure and Development. New Haven, CT: Yale University Press.
Gupta, R. (2005). Essays of Financial Repression. Ph.D. Dissertation, University of Connecticut.
Harding, D. & Pagan, A. (2002). Dissecting the Cycle. A Methodological Investigation. Journal of Monetary Economics, 49(2), 365-381.
Hmailton, J. D. (1989). A New Aproach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57(2), 357-384.
Hsu, C. C., Wu, J. Y., & Yau, R. (2011). Foreign direct investment and business cycle movements. Journal of Macroeconomics, 33(4), 770-783.
Kalemli-Ozcan, S., Papaioannou, E., Peydró, J. L. (2010). Financial integration and Business Cycle Synchronization, The panel data evidence. NBER Working Papers no14887.
Karimi, F, Pirasteh, H., Tayebi, S.K. (2009). Assessing the Factors Affecting the Synchronization of Business Cycles in the Members of the Organization of the Islamic Conference. Journal of Economic Research, 9 (4), 265-288. (in Persian)
Khalatbari, F. (1992). Collection of monetary, banking and international concepts. Tehran, Shabaviz Publishers. (in Persian)
Kim, C., Nelson, R. (1999). State-Space Models with Regime Switching. MIT Press.
Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35(2), 688-726.
Lynch, D. (1996). Measuring Financial Sector Development: A Study of Selected Asia-Pacific Countries. Developing Economies, 32(1), 3-33.
MacDonal, M. (2016). International Capital Market Frictions and Spillovers from Quantitative Easing. Working Paper No. 1346, Queen’s Economics Department.
McKinnon, R. (1973). Money and Capital in Economic Development. Washington: Brookings Inst.
Nzotta, S.M, & Okereke, E.J, (2009), “Financial Deepening and Economic Development of Nigeria: an Empirical Investigation”. African Journal of Accounting, Economics, Finance and Banking Research, 5(5), 52-66.
Rahnama Roodposhti, F., Taqavi, M., Shawrdiyni, Sh. (2013). Financial deepening and development of the financial system. Financial Markets Analysis of Securities, 6 (17), 15-28. (in Persian)
Rashedi, A., Fayyazi, J., Vatankhah, M. And Beigi Nasiri, M. (2013). Estimation of Co (Co) variances and genetic parameters of growth traits in Lori Bakhtiari lambs using Gibbs sampling method. Journal of Research in Ruminants, 1(3), 109-128. (in Persian)
Sadeghi, S. (2014). The Effect of Trade and Financial Integrity on the Synchronization of the Business Period in ECO: Evidence from a Dynamic Correlation Index. Planning and Budget Schedule, 19(2), 151-168. (in Persian)
Shakibaee, A., Shah Sanai, H. (2012). Review of economic convergence and business cycle synchronization in the Shanghai Group. Economic Research Journal, 12 (3), 89-105. (in Persian)
Shaw, E. S. (1973). Financial Deepening in Economic Development. New York: Oxford University Press.
Shin, K. & Wang, Y. (2004). Trade Integration and Business Cycle Synchronization in East Asia. Paper Provided by East Asian Bureau of Economic Research in its Series Trade Working Papers, No. 360.
Taghavi, M. (2009). Financial Development, Investment and Economic Growth. Financial Studies, 2(2), 51-64. (in Persian)
Vaezi, M. (2009). World Economic Crisis, Fields, Dimensions and Consequences. Foreign Relations Journal, 1 (1), 155-187. (in Persian)
Yao, W. (2012). International Business Cycles and Financial Friction. Bank of Canada Working Paper, No. 2012-19.
Zhang, Y. (2011). Financial Factors and Labour Market Fluctuations. Bank of Canada. Working Paper No.2011-12.