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Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity





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    • Kalemli-Ozcan is with University of Maryland, Centre for Economic Policy Research (CEPR), and National Bureau of Economic Research (NBER); Papaioannou is with London Business School, CEPR, and NBER; and Peydró is with Universitat Pompeu Fabra and Barcelona Graduate School of Economics. This paper was previously circulated under the title “Financial Integration and Business Cycle Synchronization.” Essential parts of the paper were prepared while Sebnem Kalemli-Ozcan was visiting the European Central Bank (ECB) as a 2008 Duisenberg Fellow. She thanks the economists at the Bank for providing a stimulating research environment. This paper was written when Kalemli-Ozcan was at University of Houston and Kuc University and Papaioannou was at the Economics Department of Dartmouth College and Harvard University. We thank two anonymous referees, the Associate Editor, an advisor, Cam Harvey (the Editor), John Campbell, Harris Dellas, Domenico Giannone, Jean Imbs, Simone Manganelli, Gian Maria Milesi-Ferretti, Bent Sørensen, Marco Pagano, Fabrizio Perri, Andrei Shleifer, Aaron Tornell, Francis Warnock, Axel Weber, and seminar participants at University of California Los Angeles, Brown, Dartmouth College, Harvard Business School, University of Maryland, the ECB, the Oesterreichische Nationalbank, Athens Laboratory of Business Administration, the 5th ECB Central Banking Conference, the Bank for International Settlements– Commitee on the Global Financial System Workshop on Global Financial Stability, Conference on Research on Economic Theory and Econometrics, the CEPR-European University Institute workshop on Globalization, the NBER Summer Institute, the Federal Reserve Bank of Dallas, and the 2010 American Economic Association Meetings for helpful comments and suggestions. Dimitrios Rakitzis and Francesc Rodriguez-Tous provided excellent research assistance.


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.

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