We at General Motors want to help you keep your vehicle in good working condition. But we don’t know exactly how you’ll drive it. You may drive very short distances only a few times a week. Or you may drive long distances all the time in very hot, dusty weather. You may use your vehicle in making deliveries. Or you may drive it to work, to do errands or in many other ways.
Diabetes is a multisystem disorder caused by a relative or absolute lack of insulin. The prevalence of diabetes is approximately 7%. The majority (85%) have type 2 diabetes. With increasing obesity, reduced exercise and alterations in dietary habits, the prevalence of diabetes is increasing. For every case of diagnosed type 2 diabetes, there is another undiagnosed individual.
Standard theoretical models predict that financial integration should lead to a lower degree of business cycle synchronization. In the canonical two-country general equilibrium model with complete financial markets, the country hit by a positive productivity shock experiences an increase in the marginal product of capital and labor, and receives capital on net—a mechanism that leads to negative output correlations between the two countries (e.g. Backus, Kehoe, and Kydland (1992) and Baxter and Crucini (1995)). Obstfeld (1994) formalizes another mechanism that also yields a negative link between financial integration and business cycle synchronization. In his model, financial integration shifts investment towards risky projects, enabling countries to specialize according to their comparative advantage, which implies that output growth among financially integrated countries should be negatively correlated. There might also be the case, where causality runs the other way since diversification benefits become larger with less correlated shocks across countries. Heathcote and Perri (2004) develop a model, where less correlated cycles lead to an increase in the equilibrium level of financial integration. In their set-up, a higher level of financial integration further reduces the correlation of the business cycles.
Surprisingly, the empirical literature fails to find the theoretically predicted negative association between financial integration and business cycle synchronization in the data. If anything, cross-country studies find a significant positive correlation between financial integration and GDP co-movement. While one could reconcile the positive association between synchronization and integration introducing market imperfections such as information frictions, contagion and moral hazard (e.g. Calvo and Mendoza (2001); Morgan, Rime, and Strahan (2004)), it is not entirely clear why different cross-sectional studies focusing on different country samples and time periods, all find exactly the opposite prediction of the standard models. Our contribution, in this paper, is to document the theoretically predicted negative effect of financial integration on business cycle synchronization as a robust regularity.
