Finance and Synchronization

38 Pages Posted: 31 Aug 2016

See all articles by Ambrogio Cesa-Bianchi

Ambrogio Cesa-Bianchi

Bank of England

Jean M. Imbs

Paris School of Economics (PSE); NYU Abu Dhabi; Centre for Economic Policy Research (CEPR)

Jumana Saleheen

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2016

Abstract

In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (eg, where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But finance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks.

Keywords: Financial Linkages, Business Cycles Synchronization, Contagion, Common Shocks

JEL Classification: E32, F15, F36, G21, G28

Suggested Citation

Cesa-Bianchi, Ambrogio and Imbs, Jean M. and Saleheen, Jumana, Finance and Synchronization (August 25, 2016). Bank of England Working Paper No. 612, Available at SSRN: https://ssrn.com/abstract=2832225 or http://dx.doi.org/10.2139/ssrn.2832225

Ambrogio Cesa-Bianchi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/site/ambropo/

Jean M. Imbs

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

NYU Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jumana Saleheen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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