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

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  • J. Scott Davis

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.

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  • J. Scott Davis, 2011. "Financial integration and international business cycle co-movement: the role of balance sheets," Globalization Institute Working Papers 89, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:89
    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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    Cited by:

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    3. Pedro André Cerqueira, 2014. "Business Cycle Synchronization and Volatility Shifts," GEMF Working Papers 2014-19, GEMF, Faculty of Economics, University of Coimbra.

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    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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