Financial integration and international business cycle co-movement

Jonathan Davis

Journal of Monetary Economics, 2014, vol. 64, issue C, 99-111

Abstract: International business cycle transmission through integrated financial markets occurs through wealth and balance sheet effects. Balance sheet effects lead to business cycle convergence, but wealth effects lead to divergence. This paper shows empirically that debt market integration has a positive effect on co-movement, implying that balance sheet effects are the main conduit for international transmission through integrated debt markets. Equity market integration has a negative effect, implying that wealth effects are the main channel for international transmission through integrated equity markets. Distinguishing between wealth and balance sheet effects resolves some key discrepancies between empirical and theoretical findings in international macroeconomics.

Keywords: Financial integration; Business cycle co-movement; Wealth effect; Balance sheet effect (search for similar items in EconPapers)
JEL-codes: E30 E44 F40 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:64:y:2014:i:c:p:99-111

DOI: 10.1016/j.jmoneco.2014.01.007

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