Business and financial cycles in Rwanda

Abstract

The global financial crisis has made it apparent that the financial cycle plays a more prominent role in macroeconomic dynamics. Cross-country studies have revealed significant links between business and financial cycles and have suggested policymakers closely monitor the likely impact of shocks from the
financial sector on the real economy. Against this background, this paper explores the linkages between Rwanda’s business and financial cycles. The empirical results from Wavelet analysis and Structural Vector Autoregressive (SVAR) model indicate that the financial cycle (proxied by overall credit to GDP gap)
is closely related to the business cycle (proxied by the output gap), especially in the medium-term, with credit responding more to output. The results point out the presence of macro-financial linkages in Rwanda and highlight the potential risks of a shock from one sector to another.