Finance and Synchronization

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 25 August 2016

Working Paper No. 612
By Ambrogio Cesa-Bianchi, Jean Imbs and Jumana Saleheen

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.

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