Discussion Papers of Business and Economics
Department of Business and Economics, University of Southern Denmark
Should we expect financial globalization to have significant effects on business cycles?
Abstract: Empirical research suggests that financial globalization
has insignificant effects on business cycles. Based on standard theoretical
models it might be conjectured that the effects should be significant. I
show that this conjecture is wrong. Theoretical effects of financial
globalization can be determined to any level of precision by expanding the
underlying artificial samples. In contrast, in the data the effects are
imprecisely estimated because of short samples. I show that if the
conclusion is based on empirically relevant sample sizes, a benchmark
international real business cycle model predicts insignificant effects of
financial integration for all business cycle statistics except the
correlation of consumption. A sensitivity analysis shows that under
alternative model structures even the effect on the consumption correlation
is insignificant. My results suggest that we should not expect financial
globalization to have significant effects on business cycles.
Keywords: Financial Globalization; Business Cycles; Monte Carlo Methods; (follow links to similar papers)
JEL-Codes: C15; E44; G15; (follow links to similar papers)
31 pages, October 1, 2009
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