Does debt market integration amplify the international transmission of business cycles during financial crises? q

Abstract

The international transmission of real business cycles during financial crises differs dramatically depending on the type of debt market integration. Using a bilateral country pair dataset of 57 countries covering the period 2001-2013, we find robust empirical evidence that short-term debt integration drove business cycle synchronization during the global financial crisis (GFC) and European sovereign debt crisis. However, we also find that long-term debt integration cushioned the international transmission of business cycles during the crises. Our findings distinguish two transmission channels of financial shocks: the balance sheet effect through the integrated short-term debt market and risk-sharing through long-term debt market integration. (c) 2021 Elsevier Ltd. All rights reserved.