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Financial integration within Europe and the international transmission of business cycles among industrialized countries

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  • Mar𨀠 P𨁏livero
  • Robert Madak

Abstract

We exploit a dataset on financial integration within Europe to answer a novel question in the international Real Business Cycle (RBC) literature. Does financial integration within Europe matter for the international transmission of business cycles between the United States and Europe? We find that it does, and that as European countries become more financially integrated among themselves, European business cycles start to ‘decouple’ from those in the United States. We show that this is true for three macro indicators of economic activity: Gross Domestic Product (GDP), consumption and investment, and for five alternative measures of the degree of financial integration. We also show that the effect of trade linkages becomes insignificant once financial factors are accounted for. Our work has interesting policy implications since it unveils the importance of further integration in the EU to slow down the transmission of aggregate shocks among industrialized nations.

Suggested Citation

  • Mar𨀠 P𨁏livero & Robert Madak, 2013. "Financial integration within Europe and the international transmission of business cycles among industrialized countries," Applied Economics, Taylor & Francis Journals, vol. 45(1), pages 111-122, January.
    • Handle: RePEc:taf:applec:45:y:2013:i:1:p:111-122
    DOI: 10.1080/00036846.2011.595693
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    References listed on IDEAS

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    1. Jean Imbs, 2004. "Trade, Finance, Specialization, and Synchronization," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 723-734, August.
    2. Michael D. Bordo & Thomas F. Helbling, 2011. "International Business Cycle Synchronization In Historical Perspective," Manchester School, University of Manchester, vol. 79(2), pages 208-238, March.
    3. Maria Bejan, 2007. "Some Business Cycle Consequences of Trade Agreements:The Case of the North American Free Trade Agreement," RSCAS Working Papers 2007/03, European University Institute.
    4. Pedro André Cerqueira, 2014. "Business Cycle Synchronization and Volatility Shifts," GEMF Working Papers 2014-19, GEMF, Faculty of Economics, University of Coimbra.
    5. Glenn Otto & Graham Voss & Luke Willard, 2001. "Understanding OECD Output Correlations," RBA Research Discussion Papers rdp2001-05, Reserve Bank of Australia.
    6. Michael D. Bordo & Thomas Helbling, 2003. "Have National Business Cycles Become More Synchronized?," NBER Working Papers 10130, National Bureau of Economic Research, Inc.
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    Cited by:

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    3. Hatemi-J, Abdulnasser & Mustafa, Alan, 2016. "Testing for Financial Market Integration of the Chinese Market with the US Market," MPRA Paper 72733, University Library of Munich, Germany.
    4. Balcilar, Mehmet & Kutan, Ali M. & Yaya, Mehmet E., 2017. "Financial integration in small Islands: The case of Cyprus," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 201-219.

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