The Real Effects of Global Financial Integration

Tiago Trancoso, Sofia Gomes

Abstract


Purpose: Most studies on Business Cycles Synchronisation (BCS) propose bilateral explanations for bilateral business cycle comovement. This paper purpose a global financial integration measure which allows disentangling the financial integration effect in two channels, global and bilateral.

Design/Methodology/Approach: We build a panel dataset with annual data from 20 advanced economies covering the period 1995-2011. Their methodological approach on regressing bilateral measures of financial integration on bilateral measures of output comovement. In fact, the common procedure is based on regressions that account for local country-pair interaction under the form of bilateral flow, exposure or correlation.

Findings: The empirical results suggest that accounting for global financial integration matters even for such disaggregated level of interactions. In particular, we find a large positive effect of global financial integration on bilateral output comovement. This effect outstands from the estimates of other standard BCS determinants such as bilateral financial openness, bilateral trade intensity or sector similarity.

Research limitations: Understanding the main forces driving financial and Business Cycle Synchronisation has important implications for supranational economic policies such as financial regulation and the establishment of monetary unions. Intriguingly, understanding the role of financial integration in the synchronisation of financial cycles as well as their interactions with business cycles is a matter that has received relatively little attention in the BCS literature. We plan to extend our analysis in these directions in a follow-up paper.

Practical implications: This paper contributes to the BCS literature by proposing a global financial integration measure which allows disentangling the financial integration effect in two channels, global and bilateral. ­ The first contribution of this paper is the development of a new measure of the financial integration displayed by the global financial network in each period of time. The second contribution of this paper is to test empirically at what extent this new global financial integration measure improves the understanding of BSC. The third contribution of the paper is to give further insights about the discrepancy between the predicted negative relationship between financial integration and BSC by the standard comparative advantage theory and evidence from most BSC empirical studies that report a positive impact of financial integration on output comovement.

Originality/Value: This paper contributes to the BCS literature by proposing a global financial integration measure which allows disentangling the financial integration effect in two channels, global and bilateral.

 

Keywords: Financial Integration; Business Cycle Synchronisation; International Comovement; Output Comovement; Global shocks.

 

 

[PT]

Título: "Os efeitos reais da integração financeira global"

Resumo

Objetivo: A maioria dos estudos sobre sincronização de ciclos de negócios (BCS) propõe explicações bilaterais para o aprimoramento bilateral dos ciclos de negócios. Este artigo propõe uma medida de integração financeira global que permite desembaraçar o efeito da integração financeira em dois canais, global e bilateral.
Projeto / Metodologia / Abordagem: Construímos um conjunto de dados de painel com dados anuais de 20 economias avançadas, cobrindo o período 1995-2011. Sua abordagem metodológica na regressão de medidas bilaterais de integração financeira em medidas bilaterais de redução de produção. De fato, o procedimento comum é baseado em regressões que explicam a interação local entre pares de países sob a forma de fluxo, exposição ou correlação bilateral.
Resultados: Os resultados empíricos sugerem que a contabilização da integração financeira global é importante mesmo para esse nível desagregado de interações. Em particular, encontramos um grande efeito positivo da integração financeira global na redução bilateral da produção. Esse efeito se destaca das estimativas de outros determinantes padrão do BCS, como abertura financeira bilateral, intensidade comercial bilateral ou similaridade do setor.
Limitações: O entendimento das principais forças que impulsionam a sincronização financeira e do ciclo de negócios tem implicações importantes para políticas econômicas supranacionais, como regulamentação financeira e estabelecimento de uniões monetárias. Curiosamente, entender o papel da integração financeira na sincronização dos ciclos financeiros, bem como suas interações com os ciclos de negócios, é um assunto que tem recebido relativamente pouca atenção na literatura da BCS. Planejamos estender nossa análise nessas direções em um documento de acompanhamento.
Implicações: Este artigo contribui para a literatura do BCS ao propor uma medida de integração financeira global que permita desembaraçar o efeito da integração financeira em dois canais, global e bilateral. ¬ A primeira contribuição deste artigo é o desenvolvimento de uma nova medida da integração financeira exibida pela rede financeira global em cada período de tempo. A segunda contribuição deste artigo é testar empiricamente até que ponto essa nova medida de integração financeira global melhora o entendimento do BSC. A terceira contribuição do artigo é fornecer mais informações sobre a discrepância entre a relação negativa prevista entre integração financeira e BSC pela teoria da vantagem comparativa padrão e evidências da maioria dos estudos empíricos do BSC que relatam um impacto positivo da integração financeira na redução de produção.
Originalidade/valor: Este artigo contribui com a literatura do BCS ao propor uma medida de integração financeira global que permite desembaraçar o efeito da integração financeira em dois canais, global e bilateral.


Palavras-chave: Integração financeira; Sincronização de Ciclo de Negócios; Comovimento Internacional; Comovimento de saída; Choques globais.

 


Full Text:

PDF

References


Ang, A. and Longstaff, F. A. (2013) ‘Systemic sovereign credit risk: Lessons from the US and Europe’, Journal of Monetary Economics, 60(5), pp. 493–510.

Antonakakis, N. and Scharler, J. (2012) ‘The synchronization of GDP growth in the G7 during US recessions’, Applied Economics Letters, 19(1), pp. 7–11. doi: 10.1080/13504851.2011.564126.

Antonakakis, N. and Tondl, G. (2011) ‘Has Integration Promoted Business Cycle Synchronization in the Enlarged EU ?’, FIW Working Paper, 75(December), pp. 1–30.

Artis, Fidrmuc, J. and Scharler, J. (2008) ‘The transmission of business cycles’, Economics of Transition, 16(3), pp. 559–582.

Artis, M. J., Fidrmuc, J. and Scharler, J. (2008) ‘The transmission of business cycles: Implications for EMU enlargement’, Economics of Transition, 16(3), pp. 559–582. doi: 10.1111/j.1468-0351.2008.00325.x.

Artis, M. and Okubo, T. (2011) ‘Does International Trade Really Lead to Business Cycle Synchronization?−A panel data approach’.

Backus, D., Kehoe, P. J. and Kydland, F. (1995) ‘International Business Cycles: Theory vs. Evidence’, Frontiers of Business Cycle Research, pp. 331–356.

Baele, L. et al. (2004) ‘Measuring financial integration in the euro area’, Oxford Review of Economic Policy, 20(4), pp. 509–530.

Banerji, a. and Dua, P. (2010) ‘Synchronisation of Recessions in Major Developed and Emerging Economies’, Margin: The Journal of Applied Economic Research, 4(2), pp. 197–223. doi: 10.1177/097380101000400204.

Battiston, S. et al. (2012) ‘Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk’, Journal of Economic Dynamics and Control, 36(8), pp. 1121–1141.

Baur, D. G. (2011) ‘Financial contagion and the real economy’, Journal of banking & finance, 36(10), pp. 2680–2692.

Baxter, M. and Crucini, M. J. (1995) ‘Business Cycles and the Asset Structure of Foreign Trade’, International Economic Review, 36(4), pp. 821–854. doi: 10.2307/2527261.

Baxter, M. and Kouparitsas, M. A. (2005) ‘Determinants of business cycle comovement: a robust analysis’, Journal of Monetary Economics, 52(1), pp. 113–157.

Bayoumi, T. and Vitek, F. (2013) ‘Macroeconomic Model Spillovers and Their Discontents’, IMF Working Papers, 13/4(40221).

Bekaert, G. et al. (2014) ‘The Global Crisis and Equity Market Contagion’, The Journal of Finance. John Wiley & Sons, Ltd (10.1111), 69(6), pp. 2597–2649. doi: 10.1111/jofi.12203.

Benati, L. (2001) Band-pass filtering, cointegration, and business cycle analysis. Bank of England, Working Paper No 142.

Bordo, M. D. and Helbling, T. F. (2004) ‘Have National Business Cycles Become More Synchronized?’, in Macroeconomic policies in the world economy. Springer, pp. 3–39.

Bordo, M. D. and Helbling, T. F. (2011) ‘International Business Cycle Synchronization In Historical Perspective’, The Manchester School, 79(2), pp. 208–238.

Busl, C. and Kappler, M. (2013) Does Foreign Direct Investment Synchronise Business Cycles? Results from a Panel Approach, WWWforEurope No. 23.

Calvo, G. A. and Mendoza, E. G. (2000) ‘Rational contagion and the globalization of securities markets’, Journal of International Economics, 51(1), pp. 79–113.

Canova, F. (1998) ‘Detrending and business cycle facts: A user’s guide’, Journal of Monetary Economics, 41(3), pp. 533–540.

Cerqueira, P. A. (2013) ‘A Closer Look at the World Business Cycle Synchronization’, International Economics and Economic Policy, 10(3), pp. 349–363.

Cespa, G. and Foucault, T. (2014) ‘Illiquidity contagion and liquidity crashes’, in Review of Financial Studies. Narnia, pp. 1615–1660. doi: 10.1093/rfs/hhu016.

Christiano, L., Eichenbaum, M. and Evans, C. (2005) ‘Nominal rigidities and the dynamic effects of a shock to monetary policy’, Journal of Political Economy, 113(1), pp. 1–45.

Claessens, S. et al. (2011) ‘Financial Cycles: What? How? When?’, IMF Working Papers. International Monetary Fund, (8379), pp. 1–54.

Claessens, S., Kose, M. A. and Terrones, M. E. (2012) ‘How do business and financial cycles interact?’, Journal of International Economics, 87(1), pp. 178–190.

Corsetti, G., Pericoli, M. and Sbracia, M. (2011) ‘Correlation analysis of financial contagion’, in Financial Contagion: The Viral Threat to the Wealth of Nations. John Wiley & Sons Inc, pp. 11–20.

Devereux, M. B. and Yetman, J. (2010) ‘Leverage constraints and the international transmission of shocks’, Journal of Money, Credit and banking, 42(s1), pp. 71–105.

Dungey, M. et al. (2011) ‘Contagion and the Transmission of Financial Crises’, in Financial Contagion. Hoboken, NJ, USA: John Wiley & Sons, Inc., pp. 129–135. doi: 10.1002/9781118267646.ch14.

Fidrmuc, J. (2004) ‘The Endogeneity of the Optimum Currency Area Criteria, Intra‐industry Trade, and EMU Enlargement’, Contemporary Economic Policy, 22(1), pp. 1–12.

Fidrmuc, J., Ikeda, T. and Iwatsubo, K. (2012) ‘International transmission of business cycles: Evidence from dynamic correlations’, Economics Letters, 114(3), pp. 252–255.

Frankel, J. A. and Rose, A. K. (1998) ‘The Endogeneity of the Optimum Currency Area Criteria.’, Economic Journal, 108(449), pp. 1009–25.

Friedman, M. (1968) ‘The role of monetary policy’, The American Economic Review, 58(1), pp. 1–17.

Gallegati, M. et al. (2008) ‘The Asymmetric Effect of Diffusion Processes: Risk Sharing and Contagion’, Global Economy Journal, 8(3).

García-Herrero, A. and Ruiz, J. M. (2008) ‘Do trade and financial linkages foster business cycle synchronization in a small economy?’, Moneda y crédito, (226), pp. 187–238.

Heathcote, J. and Perri, F. (2002) ‘Financial autarky and international business cycles’, Journal of Monetary Economics, 49(3), pp. 601–628.

Imbs, J. (2004) ‘Trade, finance, specialization, and synchronization’, Review of Economics and Statistics, 86(3), pp. 723–734.

Imbs, J. (2006) ‘The real effects of financial integration’, Journal of International Economics, 68(2), pp. 296–324.

Imbs, J. (2010) ‘The First Global Recession in Decades’, IMF Economic Review, 58(2), pp. 327–354. doi: 10.1057/imfer.2010.13.

Inklaar, R., Jong-A-Pin, R. and De Haan, J. (2008) ‘Trade and business cycle synchronization in OECD countries—A re-examination’, European Economic Review, 52(4), pp. 646–666.

Kalemli-Ozcan, S., Papaioannou, E. and Peydró, J.-L. (2013) ‘Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity: Financial Integration and Synchronization’, Journal of Finance, 68(3), pp. 1179–1228. doi: 10.1111/jofi.12025.

Kaminsky, G. L., Reinhart, C. M. and Végh, C. A. (2003) ‘The Unholy Trinity of Financial Contagion’, Journal of Economic Perspectives, 17(4), pp. 51–74. doi: 10.1257/089533003772034899.

Kose, M. A. et al. (2009) ‘Financial globalization: A reappraisal’, IMF Staff Papers, 56(1), pp. 8–62.

Kose, M. A., Prasad, E. S. and Terrones, M. E. (2003) ‘Financial integration and macroeconomic volatility’, IMF Staff Papers, pp. 119–142.

Lane, P. R. and Milesi-Ferretti, G. M. (2007) ‘The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004’, Journal of International Economics. North-Holland, 73(2), pp. 223–250. doi: 10.1016/J.JINTECO.2007.02.003.

Mitchell, W. C. (1927) ‘The Processes Involved in Business Cycles’, NBER Chapters. National Bureau of Economic Research, Inc, pp. 1–60.

Mitra, S. and Sinclair, T. M. (2012) ‘Output Fluctuations in the G-7: an Unobserved Components Approach’, Macroeconomic Dynamics, 16(03), pp. 396–422. doi: 10.1017/S1365100510000647.

Morgan, D. P., Rime, B. and Strahan, P. E. (2004) ‘Bank integration and state business cycles’, The Quarterly Journal of Economics, 119(4), pp. 1555–1584.

Otto, G., Voss, G. and Willard, L. (2001) ‘Understanding OECD output correlations’, RBA Research Discussion Papers. Sydney: Economic Research Department, Reserve Bank of Australia, (2001-05).

Perri, F. and Quadrini, V. (2018) ‘International Recessions’, American Economic Review, 108(4–5), pp. 935–984. doi: 10.1257/aer.20140412.

Rana, P. B. (2008) ‘Trade intensity and business cycle synchronization: The case of East Asia’, The Singapore Economic Review. World Scientific Publishing Company, 53(02), pp. 279–292. doi: 10.1142/S021759080800294X.

Schiavo, S. (2008) ‘Financial integration, GDP correlation and the endogeneity of optimum currency areas’, Economica, 75(297), pp. 168–189. doi: 10.1111/j.1468-0335.2007.00598.x.

Siedschlag, I. and Tondl, G. (2011) ‘Regional output growth synchronisation with the Euro Area’, Empirica, 38(2), pp. 203–221.

Trancoso, T. (2014) ‘Emerging markets in the global economic network: Real(ly) decoupling?’, Physica A: Statistical Mechanics and its Applications, 395, pp. 499–510.

Yetman, J. (2011) ‘Exporting recessions: international links and the business cycle’, Economics Letters, 110(1), pp. 12–14.




Copyright (c) 2019 European Journal of Applied Business and Management

ISSN: 2183-5594 

Indexing: GOOGLE SCHOLAR - LATINDEX - DRJI - ICI JOURNALS MASTER - REDIB