Financial Integration and Business Cycle Synchronization

54 Pages Posted: 15 Jul 2009

See all articles by Sebnem Kalemli-Ozcan

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Koc University, Graduate School of Business

Elias Papaioannou

Dartmouth College - Department of Economics

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: May 2009

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.

Keywords: Banks, Business Cycles, Co-movement, Financial Integration, Financial Regulation

JEL Classification: E32, F15, F36, G21, O16

Suggested Citation

Kalemli-Ozcan, Sebnem and Papaioannou, Elias and Peydro, Jose-Luis, Financial Integration and Business Cycle Synchronization (May 2009). CEPR Discussion Paper No. DP7292, Available at SSRN: https://ssrn.com/abstract=1433887

Sebnem Kalemli-Ozcan (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Koc University, Graduate School of Business ( email )

Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
Turkey

Elias Papaioannou

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

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