Scandinavian Working Papers in Economics

Discussion Papers of Business and Economics,
University of Southern Denmark, Department of Business and Economics

No 6/2009: Should we expect financial globalization to have significant effects on business cycles?

Jens Iversen
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Jens Iversen: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

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

JEL-codes: C15; E44; G15

31 pages, October 1, 2009

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