Abstract: At the beginning of 2022, China’s real economy and financial market fell into a double weakening situation, which made the coordinated governance of “stabilizing macroeconomic growth” and “preventing systematic financial risk” become a core issue once again. The key of accurately solving this problem is to clarify the time-varying correlation mechanism between business cycle and financial cycle, as it is not only the basis for understanding the fundamental characteristics and behavioral laws of the macroeconomic and financial system, but also the core and essence of guiding the economy to get rid of the “real to virtual” dilemma in the long term. Therefore, based on the idea of precise measurement and the construction of the economic cycle index and financial cycle index, this paper employs the time-varying Granger causality test and the DY dynamic spillover index to accurately investigate the time-varying correlation mechanism between China’s business cycle and financial cycle. The research finds that: First, as for the basic shape of business cycle and financial cycle, China has experienced three complete business cycles and four complete financial cycles from 2003 to 2021. This shows that there is a typical cycle mismatch between China’s business cycle and financial cycle with both typical coupling intervals and significant divergence periods. Second, as for the transmission mechanism between business cycle and financial cycle, using the traditional linear Granger causality test to identify the mechanism will lead to serious judgement bias. The time-varying Granger causality test results show that in most periods, there is no conduction relationship between business cycle and financial cycle, and only when the cycles deviate significantly from each other or rare disaster shocks occur, there will be an obvious interaction or pulling effect. Third, as for the interaction between business cycle and financial cycle, the spillover effect of financial cycle on business cycle is strong, while the spillover effect of business cycle on financial cycle is weak. However, since the outbreak of the COVID-19 epidemic, the interaction between the two cycles has significantly increased, which indicates that the correlation between China’s business cycle and financial cycle has continuously improved. Fourth, the linkage between macroeconomic variables is usually unstable, which indicates that future macroeconomic research should focus on the directionality, stability, sustainability and strength of the linkage mechanism, and strengthen the idea of precise measurement. On the one hand, it is conducive to grasping the essential relationship between economic variables; on the other hand, it is also an inevitable requirement for the modern macroeconomic governance system to emphasize efficiency, synergy and crisis management abilities.

Keywords: business cycle; financial cycle; time-varying Granger causality test; DY dynamic spillover index