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Discussion of

“Finance and Synchronization”

Ambrogio Cesa-Bianchi, Jean Imbs

& Jumana Salaheen

Robert Kollmann, ECARES, ULB and CEPR

10th

CEPR-MGI Conference Dublin, March 6-7, 2015

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● Very promising & thought-provoking paper

● Interesting and important novel analytical insights

& empirical results

● Addresses key research question in international

macro: What is effect of financial globalization on

cross-country business cycle synchronization ?

●Theory says: effect depends on type of shocks

& financial structure importance to let the data

speak about shocks & channels

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●In basic RBC model (BKK, 1992):

► Country-specific TFP shocks trigger less

synchronized Home & Foreign GDP responses under

complete internat. markets than under autarky:

Home TFP Home GDP

Risk sharing: Foreign C Foreign Hours

Foreign GDP

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► Other shocks may trigger more synchronized GDP

responses under complete markets:

■ Government purchases shocks

Home G Home & Foreign C ; H & F Hours &

GDP

■ Consumption taste shocks: ln( ) ( )U C L

Home H & F Hours and GDP

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● Closer financial integration may imply that

FINANCIAL shocks are more strongly positively

transmitted across countries

Krugman (2008) „International Financial Multiplier‟

Devereux &Yetman(2010),Devereux &Sutherland(2011)

Kollmann, Enders & Müller (2010), Kollmann (2013)

Global transmission of local loan losses when banks

face capital constraints

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Empirical evidence:

Unconditional correlation between fin.

integration & macro synchronization

is POSITIVE:

Country pairs with stronger financial links

have more synchronized biz cycles

See: Imbs (2006)

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But: this does not imply causation

Countries with common language, more

similar legal systems, closer cultural &

political ties are MORE CLOSELY

INTEGRATED FINANCIALLY &

MORE SYNCHRONIZED BIZ CYCLE

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Kalemli-Ozcan, Papaoiannou & Peydro

(2013) [KPP]:

Conditional on country-pair heterogeneity,

Financial integration has NEGATIVE effect

on GDP synchronization

(Country-pair fixed effect)

For a given country pair, closer financial

Integration LOWERS GDP synchronization

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KPP measure synchronization between

countries i & j as:

, , , ,| |i j t i t j tS y y

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, , , ,| |i j t i t j tS e e

, ,i t i t i ty e

, ,, :i t j ty y GDP growth rates

t : common shock to growth rate

,i te : idiosyncratic shock to growth rate

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KPP regression result:

, , , , , , , , ,i j t i j t i j t i j t i j tS K Z

KEY RESULT: 0

, , :i j tK financial integration index

,i j : country-pair fixed effect (controls for

cultural/political proximity)

t : year fixed effect (controls for global shocks)

, ,i j tZ : other factors („gravity‟ measures etc)

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Contribution of paper by Ambrogio, Jean

& Salaheen:

Provide deeper analysis of link between

Finance and Synchronization

using richer time series model of GDP

growth

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KPP control for global shocks, but

assume that global shocks have SAME

effects for ALL country pairs:

, ,i t i t i ty e (GDP growth rate)

, , , , , , , , , , ,| |i j t i t j t i j t i j t i j t i j tS e e K Z

Global shocks

Have same loading for all i,j

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But: in real world global shocks can have country-specific effects

(eg oil price shock has different effects, depending on country‟s sectoral structure)

Jean et al. thus assume that GDP growth AND financial linkages are driven by FACTOR model, with country-specific loadings:

, , ,Y Y y

i t i i t i ty a b F :tF global factor

, , , , ,| | | ( ) ( ) |Y Y Y Y

ij t i t j t i j i j t i t i tS y y a a b b F

, ,

K K K

ij t ij ij t ij tK a b F

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Authors use principal components as factors.

Small number of factors explain most of the variation

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Decomposing synchronization measure:

, , , , ,| | | ( ) ( ) |Y Y Y Y

ij t i t j t i j i j t i t i tS y y a a b b F

, | ( ) |F Y Y

ij t i j tS b b F contrib. of cross-country

differences in loading on global Factors to synchronization

, , ,| |ij t i t i tS effect of idiosyncratic shocks

on synchronization

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Key result (18 advanced econ, 1980-2012 )

RESULT 1

Cross-country differences in loadings on global factors are main driver of:

● changes in output synchronization

● inverse link between financial linkage and synchronization

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RESULT 2:

Fluctuations in synchronization due to IDIOSYNCRATIC GDP shocks are POSITIVELY correlated with financial linkages

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QUESTIONS/COMMENTS:

● Authors should provide explanation & intuition for MAIN RESULT that Cross-country differences in loadings on global factors drive inverse link between financial linkage and synchronization.

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, | ( ) |F Y Y

ij t i j tS b b F is NEGATIVELY correlated

with , ,

K K K

ij t ij ij t ij tK a b F

, , ,( , ) | | (| |, )F Y Y K

ij t ij t i j i jCov S K b b b Cov F F

If pdf of F is SYMMETRIC, then (| |, ) 0Cov F F !!

If normalize global factor so that rise in F represents rise in world output and in fin. integration, then , 0K

i jb

, ,( , ) 0F

ij t ij tCov S K IFF (| |, ) 0Cov F F

Result 1 must be driven by fact that factors are RIGHT-SKEWED. Seem odd!!

macro/fin variables LEFT-SKEWED (if at all)

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● During estimation period (1980-2012) global financial markets have grown tremendously.

If finance matters for international shock transmission, FACTOR loadings are likely to have changed.

► It seems odd to analyze Finance & Synchronization using FIXED factor loadings

►Should not use principal components extracted from variables that have trends (PC only valid for STATIONARY variables)

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SUGGESTIONS FOR FUTURE WORK:

● Need to understand nature of global &

idiosyncratic shocks. This is crucial for

normative/policy implications of results

Shock candidates:

technology, commodity price shocks, global

monetary policy changes, global asset bubbles

etc.

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● Other shock attributes may be key: theory

suggests that PERSISTENCE of shocks matter

for internat. transmission and risk sharing.

Would be useful to empirically disentangle

transitory from permanent shocks.

● To identify shocks need estimated DSGE

models with endogenous financial integration

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SUMMARY:

● THOUGHT-PROVOKING, NOVEL

EMPIRICAL ANALYSIS

●BUT NEED TO CLARIFY RESULTS

●EXCELLENT PAPER

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THANK YOU !