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The Real Effects of Financial Integration

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Imbs, Jean

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Abstract

Fluctuations in GDP are more synchronized internationally than fluctuations in consumption, and they remain so even between financially-integrated economies, where the ranking should in theory be the reverse. This Paper shows this happens because correlations in GDP fluctuations rise with financial integration. Finance serves to increase international correlations in both consumption and GDP fluctuations, which explains the persistent gap between the two in the data. The positive association between financial integration and GDP correlation constitutes a puzzle, as theory suggests a negative relation if anything. Nevertheless, it prevails in the data even after the effects of finance on trade and specialization are accounted for.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4335.

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Date of creation: Mar 2004
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Handle: RePEc:cpr:ceprdp:4335

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Related research
Keywords: financial integration; international business cycles; quantity puzzle; risk sharing;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F30 - International Economics - - International Finance - - - General
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Quinn, Dennis & Voth, Hans-Joachim, 2008. "Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001," CEPR Discussion Papers 7013, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Kose, M. Ayhan & Otrok, Christopher & Prasad, Eswar, 2008. "Global Business Cycles: Convergence or Decoupling?," IZA Discussion Papers 3442, Institute for the Study of Labor (IZA). [Downloadable!]
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  3. Kim, Soyoung & Lee, Jong-Wha & Park, Cyn-Young, 2009. "Emerging Asia: Decoupling or Recoupling," Working Papers on Regional Economic Integration 31, Asian Development Bank. [Downloadable!]
  4. Dan Andrews & Marion Kohler, 2005. "International Business Cycle Co-movements through Time," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia. [Downloadable!]
  5. Ventura, Luigi, 2008. "Risk sharing opportunities and macroeconomic factors in Latin American and Caribbean countries : A consumption insurance assessment," Policy Research Working Paper Series 4490, The World Bank. [Downloadable!]
  6. Andrew Swiston & Tamim Bayoumi, 2008. "Spillovers Across NAFTA," IMF Working Papers 08/3, International Monetary Fund. [Downloadable!]
  7. Claudio Morana, 2006. "International Stock Markets Comovements: the Role of Economic and Financial Integration," ICER Working Papers 25-2006, ICER - International Centre for Economic Research. [Downloadable!]
  8. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers iewwp376, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  9. Agustín S. Bénétrix and Sébastien Wälti, 2008. "Indicators of regional financial integration," The Institute for International Integration Studies Discussion Paper Series iiisdp243, IIIS. [Downloadable!]
  10. Sebnem Kalemli-Ozcan & Elias Papaioannou & José Luis Peydró, 2009. "Financial Integration and Business Cycle Synchronization," NBER Working Papers 14887, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. M. Ayhan Kose & Guy Meredith & Christopher M. Towe, 2004. "How Has NAFTA Affected the Mexican Economy? Review and Evidence," IMF Working Papers 04/59, International Monetary Fund. [Downloadable!]
  12. Martin Schneider & Gerhard Fenz, 2008. "Transmission of business cycle shocks between the US and the euro area," Working Papers 145, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  13. Vincent Labhard & Michael Sawicki, . "International and intranational consumption risk sharing: the evidence for the United Kingdom and OECD," Bank of England working papers 302, Bank of England. [Downloadable!]
  14. Dennis Quinn & Joachim Voth, 2006. "A Century of Global Equity Market Correlations," Economics Working Papers 1119, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008. [Downloadable!]
    Other versions:
  15. Claudio Morana, 2008. "International stock markets comovements: the role of economic and financial integration," Empirical Economics, Springer, vol. 35(2), pages 333-359, September. [Downloadable!] (restricted)
  16. Juan A. Lafuente & Javier Ordoñez, 2007. "The Effect Of The Emu On Short And Long-Run Stock Market Dynamics: New Evidence On Financial Integration," Working Papers. Serie EC 2007-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  17. Kalemli-Ozcan, Sebnem & Papaioannou, Elias & Peydró-Alcalde, José Luis, 2009. "Financial Integration and Business Cycle Synchronization," CEPR Discussion Papers 7292, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  18. Jean Imbs & Paolo Mauro, 2007. "Pooling Risk Among Countries," IMF Working Papers 07/132, International Monetary Fund. [Downloadable!]
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  19. Barbara Berkel, 2006. "The EMU and German Cross-Border Portfolio Flows," MEA discussion paper series 06110, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  20. Barbara Berkel, 2006. "The EMU and German Cross-Border Portfolio Flows," MEA discussion paper series 06110, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  21. Irina Tytell & Selim Elekdag & Ravi Balakrishnan & Stephan Danninger, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund. [Downloadable!]
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