Financial regulation, financial globalization, and the synchronization of economic activity

Kalemli-Özcan, Şebnem; Papaioannou, Elias; Peydró, José-Luis

doi:http://dx.doi.org/10.1111/jofi.12025

Financial regulation, financial globalization, and the synchronization of economic activity

Citation

Kalemli‐Özcan S, Papaioannou E, Peydró JL. Financial regulation, financial globalization, and the synchronization of economic activity. J Financ. 2013 Jun;68(3):1179-228. DOI: 10.1111/jofi.12025

Abstract

We analyze the impact of financial globalization on business cycle synchronization using a proprietary database on banks’ international exposure for industrialized countries during 1978 to 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 due to higher integration using an exogenous de‐jure measure of integration based on financial regulations that harmonized EU markets.