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Financial integration and international business cycle co-movement

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  • Davis, J. Scott

Abstract

International business cycle transmission through integrated financial markets occurs through wealth and balance sheet effects. Balance sheet effects lead to business cycle convergence, but wealth effects lead to divergence. This paper shows empirically that debt market integration has a positive effect on co-movement, implying that balance sheet effects are the main conduit for international transmission through integrated debt markets. Equity market integration has a negative effect, implying that wealth effects are the main channel for international transmission through integrated equity markets. Distinguishing between wealth and balance sheet effects resolves some key discrepancies between empirical and theoretical findings in international macroeconomics.

Suggested Citation

  • Davis, J. Scott, 2014. "Financial integration and international business cycle co-movement," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 99-111.
  • Handle: RePEc:eee:moneco:v:64:y:2014:i:c:p:99-111
    DOI: 10.1016/j.jmoneco.2014.01.007
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    More about this item

    Keywords

    Financial integration; Business cycle co-movement; Wealth effect; Balance sheet effect;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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