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Global Banks and Crisis Transmission

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  • Sebnem Kalemli-Ozcan

    (University of Houston and NBER)

Abstract

We study how the 2007--2009 crisis has changed the impact of financial integration on the transmission of international business cycles, focusing on a sample of 20 developed countries between 1978 and 2009. We find that while increases in financial linkages were associated with more divergent output cycles before 2007, during the recent crisis more integrated countries co-move more. We document that countries with stronger financial ties to the U.S. both directly and indirectly via financial centers experienced more synchronized cycles with the U.S. We then develop a simple general equilibrium model of international banking allowing for both productivity and credit shocks to interpret these empirical findings. Our model delivers the following predictions. When productivity shocks are the dominant source of fluctuations, a higher level of banking integration results in less synchronized business cycles; if financial shocks become the dominant source of fluctuations, then a higher level of banking integration results in more synchronized business cycles.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1376.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1376

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