Financial integration and international business cycle co-movement: the role of balance sheets

No 89, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper investigates the effect of international financial integration on international business cycle co-movement. We first show with a reduced form empirical approach how capital market integration (equity) has a negative effect on business cycle co-movement while credit market integration (debt) has a positive effect. We then construct a model that can replicate these empirical results.> ; In the model, capital market integration is modeled as crossborder equity ownership and involves wealth effects. Credit market integration is modeled as cross-border borrowing and lending between credit constrained entrepreneurs and banks, and thus involves balance sheet effects. The wealth effect tends to reduce cross-country output correlation, but balance sheet effects serve to increase correlation as a negative shock in one country causes loan losses on the balance sheets of foreign banks.> ; In versions of the model with a financial accelerator and balance sheet effects, credit market integration has a positive effect on cyclical correlation. However, in versions of the model without the financial accelerator and balance sheet effects, credit market integration has a negative effect on cyclical correlation.

JEL-codes: E30 E44 F40 G15 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-dge, nep-ifn, nep-mac and nep-opm
Note: Published as: Davis, J. Scott (2014), "Financial Integration and International Business Cycle Co-movement," Journal of Monetary Economics 64: 99-111.
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:89

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