Regime‐Dependent Dynamics of Business and Financial Cycles: A Markov‐Switching Framework for Morocco

ABSTRACT

This study aims to investigate the state‐dependent interactions between business and financial cycles, challenging the linear assumptions prevalent in existing literature and arguing that these relationships are fundamentally regime‐contingent. We employ a dual Markov‐switching regression (MSR) framework to estimate two distinct models: one for the business cycle (output gap) and another for the financial cycle (private sector credit). This approach allows for the identification of distinct economic and financial regimes and an analysis of how drivers shift between them. Our results reveal an asymmetry. We identify distinct ‘expansion’ and ‘recession’ regimes for the real economy and ‘credit boom’ and ‘credit crunch’ regimes for finance. Crucially, credit contractions are significantly more persistent than expansions, and the fundamental drivers of each cycle shift dramatically across regimes, and in some cases decouple. We also document frequent desynchronization between cycles, signalling underlying vulnerabilities. The findings necessitate a paradigm shift towards pre‐emptive, state‐contingent and frequency‐aware policy framework. For Morocco and similar emerging markets, this means macroprudential tools must be deployed aggressively during booms, while targeted interventions, rather than conventional monetary policy alone, are required to address persistent credit crunches. This research provides a template for policy design in economies navigating the complex interplay of financial integration and external volatility.