IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Does Foreign Direct Investment Synchronise Business Cycles? Results from a Panel Approach

  • Claudia Busl
  • Marcus Kappler

A considerable degree of business cycle synchronization is key to a successful operating currency union. The European Monetary Union as well as many other countries strives to attract foreign direct investment (FDI) because of its reputation as being highly bene cial for the host economy. But stronger FDI linkages may also have a signi cant impact on business cycles and co-movement of these cycles between countries and therefore create a potential conflict between policies that promote FDI and the conduct of the common monetary policy. In this paper we empirically analyze the FDI channel in more detail revisiting the main determinants of synchronization. Previous studies were mainly interested in the long-run impact employing cross-sectional variation for identi cation. Their typical identification strategy, however, neglects the strongly time variant nature in the process of globalization in general and of FDI in specific. We extend the literature on the determinants of business cycle synchronization by estimating the impact of the determinants with true panel data and a suitable panel estimator. Results indicate that the trade channel is not as important as cross-section models suggest but that FDI may have the potential to increase co-movement of business cycles.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.foreurope.eu/fileadmin/documents/pdf/Workingpapers/WWWforEurope_WPS_no023_MS76.pdf
File Function: Full text
Download Restriction: none

Paper provided by WWWforEurope in its series WWWforEurope Working Papers series with number 23.

as
in new window

Length: 38
Date of creation: Jul 2013
Date of revision:
Publication status: published
Handle: RePEc:feu:wfewop:y:2013:m:7:d:0:i:23
Contact details of provider:

Order Information: Postal: WWWforEurope Project Office Austrian Institute of Economic Research Arsenal Objekt 20 A-1030 Vienna
Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Todd E. Clark & Eric Van Wincoop, 1999. "Borders and business cycles," Research Working Paper 99-07, Federal Reserve Bank of Kansas City.
  2. Jörn Kleinert & Julien Martin & Farid Toubal, 2012. "The Few Leading the Many: Foreign Affiliates and Business Cycle Comovement," Working Papers 2012-18, CEPII research center.
  3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  4. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  5. Stevens, Guy V. G. & Lipsey, Robert E., 1992. "Interactions between domestic and foreign investment," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 40-62, February.
  6. Enders, Zeno & Kollmann, Robert & Müller, Gernot, 2010. "Global Banking and International Business Cycles," CEPR Discussion Papers 7972, C.E.P.R. Discussion Papers.
  7. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053.
  8. Marianne Baxter & Michael A. Kouparitsas, 2004. "Determinants of Business Cycle Comovement: A Robust Analysis," NBER Working Papers 10725, National Bureau of Economic Research, Inc.
  9. Cavallari, Lilia, 2010. "Exports and foreign direct investments in an endogenous-entry model with real and nominal uncertainty," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 300-313, March.
  10. Imbs, Jean, 2003. "Trade, Finance, Specialization and Synchronization," CEPR Discussion Papers 3779, C.E.P.R. Discussion Papers.
  11. Jakob de Haan & Jan Jacobs & Mark Mink, 2007. "Measuring Synchronicity and Co-movement of Business Cycles with an Application to the Euro Area," CESifo Working Paper Series 2112, CESifo Group Munich.
  12. Ariel Burstein & Christopher Kurz & Linda Tesar, 2008. "Trade, Production Sharing, and the International Transmission of Business Cycles," NBER Working Papers 13731, National Bureau of Economic Research, Inc.
  13. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April.
  14. Kose, M. Ayhan & Yi, Kei-Mu, 2006. "Can the standard international business cycle model explain the relation between trade and comovement?," Journal of International Economics, Elsevier, vol. 68(2), pages 267-295, March.
  15. Dées, Stéphane & Zorell, Nico, 2011. "Business cycle synchronisation: disentangling trade and financial linkages," Working Paper Series 1322, European Central Bank.
  16. Davis, J. Scott, 2014. "Financial integration and international business cycle co-movement," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 99-111.
  17. Kollmann, Robert, 2012. "Global Banks, Fiscal Policy and International Business Cycles," MPRA Paper 69887, University Library of Munich, Germany.
  18. Baltagi, Badi H., 1981. "Simultaneous equations with error components," Journal of Econometrics, Elsevier, vol. 17(2), pages 189-200, November.
  19. Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," SSE/EFI Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
  20. W. Jos Jansen & Ad C. J. Stokman, 2006. "International Rent Sharing and Domestic Labour Markets: A Macroeconomic Analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(4), pages 792-813, December.
  21. John W. Budd & Jozef Konings & Matthew J. Slaughter, 2002. "Wages and International Rent Sharing in Multinational Firms," William Davidson Institute Working Papers Series 522, William Davidson Institute at the University of Michigan.
  22. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," NBER Working Papers 16226, National Bureau of Economic Research, Inc.
  23. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  24. Hovakimian, Gayané, 2011. "Financial constraints and investment efficiency: Internal capital allocation across the business cycle," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 264-283, April.
  25. Fabienne Ilzkovitz & Adriaan Dierx & Viktoria Kovacs & Nuno Sousa, 2007. "Steps towards a deeper economic integration: the internal market in the 21st century," European Economy - Economic Papers 271, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  26. Jean Imbs & Romain Wacziarg, 2003. "Stages of Diversification," American Economic Review, American Economic Association, vol. 93(1), pages 63-86, March.
  27. M. Ayhan Kose & Christopher Otrok & Eswar Prasad, 2012. "Global Business Cycles: Convergence Or Decoupling?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 511-538, 05.
  28. Jean Imbs, 2006. "The Real Effects of Financial Integration," Post-Print hal-00612566, HAL.
  29. Ueda, Kozo, 2012. "Banking globalization and international business cycles: Cross-border chained credit contracts and financial accelerators," Journal of International Economics, Elsevier, vol. 86(1), pages 1-16.
  30. Joshua Aizenman & Ilan Noy, 2005. "FDI and Trade -- Two Way Linkages?," NBER Working Papers 11403, National Bureau of Economic Research, Inc.
  31. Kose, M. Ayhan & Prasad, Eswar & Terrones, Marco E., 2003. "How Does Globalization Affect the Synchronization of Business Cycles?," IZA Discussion Papers 702, Institute for the Study of Labor (IZA).
  32. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
  33. Peter Egger, . "A Note on the Proper Econometric Specification of the Gravity Equation," WIFO Working Papers 108, WIFO.
  34. Eduardo Levy Yeyati & Ugo Panizza & Ernesto H. Stein, 2003. "The Cyclical Nature of North-South FDI Flows," IDB Publications (Working Papers) 6502, Inter-American Development Bank.
  35. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  36. Marcus Kappler, 2011. "Business Cycle Co-movement and Trade Intensity in the Euro Area: is there a Dynamic Link?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 231(2), pages 247-265, April.
  37. Ayhan Kose, M. & Otrok, Christopher & Whiteman, Charles H., 2008. "Understanding the evolution of world business cycles," Journal of International Economics, Elsevier, vol. 75(1), pages 110-130, May.
  38. Böwer, Uwe & Guillemineau, Catherine, 2006. "Determinants of business cycle synchronisation across euro area countries," Working Paper Series 0587, European Central Bank.
  39. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  40. Donald Morgan & Bertrand Rime & Philip Strahan, 2003. "Bank Integration and State Business Cycles," NBER Working Papers 9704, National Bureau of Economic Research, Inc.
  41. Karadimitropoulou, Aikaterini & León-Ledesma, Miguel, 2013. "World, country, and sector factors in international business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2913-2927.
  42. Devereux, Michael B. & Sutherland, Alan, 2011. "Evaluating international financial integration under leverage constraints," European Economic Review, Elsevier, vol. 55(3), pages 427-442, April.
  43. Inklaar, Robert & Jong-A-Pin, Richard & de Haan, Jakob, 2008. "Trade and business cycle synchronization in OECD countries--A re-examination," European Economic Review, Elsevier, vol. 52(4), pages 646-666, May.
  44. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc.
  45. Stefano Schiavo, 2008. "Financial Integration, GDP Correlation and the Endogeneity of Optimum Currency Areas," Sciences Po publications info:hdl:2441/9857, Sciences Po.
  46. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
  47. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
  48. Lilia Cavallari, 2008. "Macroeconomic Interdependence with Trade and Multinational Activities," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 537-558, 08.
  49. Donald P. Morgan & Bertrand Rime & Philip E. Strahan, 2004. "Bank Integration and State Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1555-1584.
  50. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2008. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2857-2888, November.
  51. Cavallari Lilia, 2007. "A Macroeconomic Model of Entry with Exporters and Multinationals," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-32, September.
  52. Hsu, Chih-Chiang & Wu, Jyun-Yi & Yau, Ruey, 2011. "Foreign direct investment and business cycle co-movements: The panel data evidence," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 770-783.
  53. Yetman, James, 2011. "Exporting recessions: International links and the business cycle," Economics Letters, Elsevier, vol. 110(1), pages 12-14, January.
  54. repec:spo:wpecon:info:hdl:2441/9857 is not listed on IDEAS
  55. Laura Alfaro & Maggie Chen, 2011. "Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance," NBER Working Papers 17141, National Bureau of Economic Research, Inc.
  56. Olivero, María Pía, 2010. "Market power in banking, countercyclical margins and the international transmission of business cycles," Journal of International Economics, Elsevier, vol. 80(2), pages 292-301, March.
  57. Glenn Otto & Graham Voss & Luke Willard, 2001. "Understanding OECD Output Correlations," RBA Research Discussion Papers rdp2001-05, Reserve Bank of Australia.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:feu:wfewop:y:2013:m:7:d:0:i:23. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.