Financial Regulation, Financial Globalization and the Synchronization of Economic Activity

Elias Papaioannou, Sebnem Kalemli-Ozcan and Jose Luis Peydro , Journal of Finance 68(3) , 1179-1228 , May 2013.

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 e↵ect 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.

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