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Should we expect financial globalization to have significant effects on business cycles?

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    Empirical research suggests that financial globalization has insignificant effects on business cycles. Based on standard theoretical models it might be conjectured that the effects should be significant. I show that this conjecture is wrong. Theoretical effects of financial globalization can be determined to any level of precision by expanding the underlying artificial samples. In contrast, in the data the effects are imprecisely estimated because of short samples. I show that if the conclusion is based on empirically relevant sample sizes, a benchmark international real business cycle model predicts insignificant effects of financial integration for all business cycle statistics except the correlation of consumption. A sensitivity analysis shows that under alternative model structures even the effect on the consumption correlation is insignificant. My results suggest that we should not expect financial globalization to have significant effects on business cycles.

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    File URL: http://static.sdu.dk/mediafiles//Files/Om_SDU/Institutter/Ivoe/Disc_papers/Disc_2009/dpbe6_2009.pdf
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    Paper provided by Department of Business and Economics, University of Southern Denmark in its series Discussion Papers of Business and Economics with number 6/2009.

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    Length: 31 pages
    Date of creation: 01 Oct 2009
    Date of revision:
    Handle: RePEc:hhs:sdueko:2009_006
    Contact details of provider: Postal:
    Department of Business and Economics, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

    Phone: 65 50 32 33
    Fax: 65 50 32 37
    Web page: http://www.sdu.dk/ivoe
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    1. 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).
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    3. Heathcote, Jonathan & Perri, Fabrizio, 2001. "Financial Globalization and Real Regionalization," Working Papers 01-05, Duke University, Department of Economics.
    4. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
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    16. Jean Imbs, 2004. "Trade, Finance, Specialization, and Synchronization," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 723-734, August.
    17. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
    18. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
    19. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    20. Sutherland, Alan, 1996. " Financial Market Integration and Macroeconomic Volatility," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 521-39, December.
    21. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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