Kalemli-Ozcan, Sebnem Papaioannou, Elias Peydró, José-Luis
Year of Publication:
[Journal:] The Journal of Finance [ISSN:] 1540-6261 [Volume:] 68 [Issue:] 3 [Pages:] 1179-1228
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 EU markets.