Working Paper: NBER ID: w14887
Authors: Sebnem Kalemli-Ozcan; Elias Papaioannou; Jos Luis Peydro
Abstract: We analyze the impact of financial globalization on business cycle synchronization utilizing a proprietary database on banks' international exposure for industrialized countries during 1978- 2006. Theory makes ambiguous predictions and identification has been elusive due to lack of bilateral time-varying financial linkages data. In contrast to conventional wisdom and previous empirical studies, we identify a strong negative effect of banking integration on output synchronization, conditional on global shocks and country-pair heterogeneity. Similarly, we show divergent economic activity as a result of higher integration using an exogenous de-jure measure of integration based on financial regulations that harmonized segmented EU markets.
Keywords: Financial Regulation; Financial Globalization; Economic Synchronization
JEL Codes: E32; F15; F36; G21; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial integration (F30) | Output divergence (C69) |
| Increased financial integration (F30) | Divergent economic activity among country pairs (F29) |
| Banking integration (G21) | Output synchronization (Y20) |
| Increases in cross-border banking activities (F65) | Less synchronized output fluctuations (E32) |