Discussion of Finance and Synchronization Ambrogio Cesa...
Transcript of Discussion of Finance and Synchronization Ambrogio Cesa...
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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