Business cycle synchronization: Disentangling direct and indirect effect of financial integration in the Indian context

Rakesh Padhan and K.P. Prabheesh

Economic Modelling, 2020, vol. 85, issue C, 272-287

Abstract: The study empirically investigates the effect of financial integration (FI) on business cycle synchronization (BCS) in the Indian context. Using concordance index, dynamic conditional correlation, and 3SLS, we find: (1) India's business cycle is significantly synchronized with nine economies (2) The evaluation of BCS shows a higher synchronization with the five economies (3) FI, directly and indirectly, reduces BCS (4) The direct effect of FI occurs through wealth effect, in most cases, indicating dominance of portfolio diversification against portfolio rebalancing associated with balance sheet effect (5) FI reduces the BCS, indirectly through intra-industry trade and differences in economic specialization.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:85:y:2020:i:c:p:272-287

DOI: 10.1016/j.econmod.2019.10.010

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