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Financial Integration and Business Cycle Synchronization

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Listed author(s):
  • Kalemli-Ozcan, Sebnem
  • Papaioannou, Elias
  • Peydró, José Luis

Abstract

Standard theory predicts that financial integration leads to a lower degree of business cycle synchronization. Surprisingly, cross-country studies find the opposite. Our contribution is to document the theoretically predicted negative effect of financial integration on business cycle synchronization as a robust regularity. We use a confidential dataset on banks' international bilateral exposure over the past three decades in a panel of twenty developed countries. The rich panel structure allows us to control for time-invariant country-pair factors and global trends that affect both financial integration and business cycle patterns. In contrast to previous empirical work we find that a higher degree of financial integration is associated with less synchronized output cycles. We also employ two distinct instrumental variable approaches to identify the one-way effect of integration on synchronization. These specifications reveal that the component of banking integration predicted by legislative-regulatory harmonization policies and the nature of the bilateral exchange rate regime has a negative effect on output synchronization.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7292.

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Date of creation: May 2009
Handle: RePEc:cpr:ceprdp:7292
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Keywords: Banks; Business Cycles; Co-movement; Financial Integration; Financial Regulation;

Find related papers by 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
  • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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Cited by:

  1. Jean Imbs, 2010. "The First Global Recession in Decades," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(2), pages 327-354, December.
  2. Agnieszka Domańska & Dobrmił Serwa, 2014. "Synchronizacja cykli koniunkturalnych a podatność gospodarek krajów Europy na skutki kryzysu gospodarczego 2008-2009," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 37.
  3. Guglielmo Maria Caporale & Alessandro Girardi, 2016. "Business cycles, international trade and capital flows: evidence from Latin America," Empirical Economics, Springer, vol. 50(2), pages 231-252, March.
  4. Fidrmuc, Jarko & Korhonen, Iikka, 2010. "The impact of the global financial crisis on business cycles in Asian emerging economies," Journal of Asian Economics, Elsevier, vol. 21(3), pages 293-303, June.
  5. Flood, Robert P. & Rose, Andrew K., 2010. "Inflation targeting and business cycle synchronization," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 704-727, June.
  6. repec:krk:eberjl:v:1:y:2013:i:3:p:7-19 is not listed on IDEAS
  7. Crespo-Cuaresma, Jesús & Fernández-Amador, Octavio, 2013. "Business cycle convergence in EMU: A first look at the second moment," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 265-284.
  8. Stéphane Dées & Nico Zorell, 2012. "Business Cycle Synchronisation: Disentangling Trade and Financial Linkages," Open Economies Review, Springer, vol. 23(4), pages 623-643, September.
  9. Erden, Lutfi & Ozkan, Ibrahim, 2014. "Determinants of international transmission of business cycles to Turkish economy," Economic Modelling, Elsevier, vol. 36(C), pages 383-390.
  10. Davis, Scott, 2011. "Financial integration and international business cycle co-movement: the role of balance sheets," Globalization and Monetary Policy Institute Working Paper 89, Federal Reserve Bank of Dallas.

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