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.
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