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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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    16. 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.
    17. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
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    20. Sutherland, Alan, 1996. " Financial Market Integration and Macroeconomic Volatility," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 521-39, December.
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