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Finance and Synchronization

Author

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  • Cesa-Bianchi, Ambrogio

    (Bank of England)

  • Imbs, Jean

    (Paris School of Economics)

  • Saleheen, Jumana

    (Bank of England)

Abstract

In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (eg, where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But finance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks.

Suggested Citation

  • Cesa-Bianchi, Ambrogio & Imbs, Jean & Saleheen, Jumana, 2016. "Finance and Synchronization," Bank of England working papers 612, Bank of England.
  • Handle: RePEc:boe:boeewp:0612
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    1. International business cycle synchronization: what is the role of financial linkages?
      by bankunderground in Bank Underground on 2016-04-06 11:30:09

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    3. Michael Stemmer, 2017. "Revisiting Finance and Growth in Transition Economies - A Panel Causality Approach," Post-Print halshs-01524462, HAL.
    4. Beyer,Robert Carl Michael & Milivojevic,Lazar, 2020. "Dynamics and Synchronization of Global Equilibrium Interest Rates," Policy Research Working Paper Series 9489, The World Bank.
    5. Gong, Chi & Kim, Soyoung, 2018. "Regional business cycle synchronization in emerging and developing countries: Regional or global integration? Trade or financial integration?," Journal of International Money and Finance, Elsevier, vol. 84(C), pages 42-57.
    6. An, Jiyoun & Kim, Kyunghun & Pyun, Ju Hyun, 2021. "Does debt market integration amplify the international transmission of business cycles during financial crises?," Journal of International Money and Finance, Elsevier, vol. 115(C).
    7. José De Gregorio, 2018. "Productivity in Emerging Market Economies: Slowdown or Stagnation?," Working Papers wp471, University of Chile, Department of Economics.
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    More about this item

    Keywords

    Financial linkages; business cycles synchronization; contagion; common shocks; idiosyncratic shocks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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