Working Paper: NBER ID: w18209
Authors: Sebnem Kalemli-Ozcan; Elias Papaioannou; Fabrizio Perri
Abstract: We study the effect of financial integration (through banks) on the transmission of international business cycles. In a sample of 20 developed countries between 1978 and 2009 we find that, in periods without financial crises, increases in bilateral banking linkages are associated with more divergent output cycles.This relation is significantly weaker during financial turmoil periods, suggesting that financial crises induce co-movement among more financially integrated countries. We also show that countries with stronger, direct and indirect, financial ties to the U.S. experienced more synchronized cycles with the U.S. during the recent 2007-2009 crisis. We then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity. The model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy, and that shocks to global banks played an important role in triggering and spreading the 2007-2009 crisis.
Keywords: Financial Integration; Business Cycles; Crisis Transmission
JEL Codes: E32; F15; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in bilateral banking linkages (F65) | more divergent output cycles between countries (O57) |
| financial crises (G01) | weaker association between banking integration and synchronization (F65) |
| financial crises (G01) | more synchronized cycles among financially integrated countries (F30) |
| stronger ties to the US (F59) | more synchronized cycles during the 2007-2009 crisis (F44) |
| indirect linkages through offshore financial centers (F65) | more synchronized cycles during the 2007-2009 crisis (F44) |