Financial Regulation, Financial Globalization and the Synchronization of Economic Activity
47 Pages Posted: 19 Jul 2010
There are 2 versions of this paper
Financial Regulation, Financial Globalization and the Synchronization of Economic Activity
Financial Regulation, Financial Globalization and the Synchronization of Economic Activity
Date Written: June 24, 2010
Abstract
We identify the effect of financial integration on international business cycle synchronization, by utilizing a confidential database on banks’ bilateral exposure and employing a country-pair panel instrumental variables approach. Countries that become more integrated over time have less synchronized growth patterns, conditional on global shocks and country-pair factors. To account for reverse causality and measurement error, we exploit variation in the transposition dates of financial legislation. We find that increases in financial integration stemming from regulatory harmonization policies are followed by more divergent cycles. Our results contrast with those of the previous studies which suffer from the standard identification problems.
Keywords: Banking Integration, Co-movement, Fluctuations, Financial Legislation
JEL Classification: E32, F15, F36, G21, G28, O16
Suggested Citation: Suggested Citation
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