Capital and credit market integration and real economic contagion during the global financial crisis |
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| Institution: | 1. Business School, Korea University, 145 Anam-Ro, Seongbuk-Gu, Seoul 02841, Republic of Korea;2. Kyung Hee University, 1732 Deogyoung-daero, Giheung-gu, Yongin-si, Gyeonggi-do 17104, Republic of Korea;1. School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood, Victoria 3125, Australia;2. Department of Banking and Finance, Monash University, Caulfield Campus, PO Box 197, Caulfield East, Victoria 3145, Australia;1. IRES and Economics School of Louvain, Université catholique de Louvain, 1348 Louvain-la-Neuve, Belgium;2. CREA, University of Luxembourg, Luxembourg;1. School of Finance, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing, China;2. IESEG School of Management, 1 parvis de La Défense, 92044 Paris La Défense Cedex, France;1. Department of Economics Université de Montréal C.P. 6128, succursale Centre-ville Montréal QC H3C 3J7 Canada;2. Development Research Group, The World Bank, 1818 H St N.W., Washington D.C. 20433, USA |
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| Abstract: | This study investigates the role of financial integration in the spread of global financial crisis. In particular, this study shows how the effect of the crisis on real business cycle co-movement varied for capital and credit market integration, using a sample of 58 countries in 2001–2013. During the global financial crisis, the United States – the epicenter of the crisis – experienced a severe downturn in the real economy, and other countries followed suit. We find that during the global financial crisis, the business cycle co-movements between the United States and the rest of the world were stronger when the level of capital market integration between them was higher. However, the co-movements were weaker when the level of credit market integration was higher. These findings are robust even when including investment channels, local fundamental factors, endogenous policy responses across countries, and alternative measures for financial integration and business cycle co-movements. |
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