The Great Recession a decade ago was one example of how economic cycles across the world can move in parallel, a phenomenon that economists don’t fully understand. It could be that a common event, such as a surge in oil prices, affects many economies at the same time—or perhaps linkages between countries transmit economic shocks from one country to the world economy.

One such linkage is multinational corporations, according to Marcus Biermann, a postdoctoral scholar at the Catholic University of Louvain, and Chicago Booth’s Kilian Huber, who explore the role of multinationals in spreading the global recession by analyzing the ripple effects of one German bank’s struggles during the 2008–09 financial crisis.

Commerzbank was Germany’s second-biggest commercial lender behind Deutsche Bank. Losses on trading and investments abroad hammered the bank, especially after Lehman Brothers collapsed in September 2008. Commerzbank’s capital fell by 68 percent between December 2007 and December 2009, which forced the bank to reduce its aggregate lending stock by 17 percent. Biermann and Huber find that this pullback in credit available to German parent companies affected subsidiaries in other countries, thus helping to transmit the economic contraction.

The researchers based their analysis on two sets of data: information from a credit-rating company on relationships between banks and corporations, and data on international units and corporate balance sheets from the German central bank. They used these data to compare the operations of foreign affiliates of companies hit by the Commerzbank credit crunch with the operations of those that weren’t. German companies tend to form close relationships with one or just a few banks, the researchers point out. The high cost of switching banks meant that Commerzbank’s lending clampdown imposed a hardship from which the multinationals couldn’t easily escape.

When Commerzbank cut lending, the bank debt of companies highly dependent on Commerzbank plunged and remained persistently low until 2015, the study finds. Biermann and Huber link this with sharply reduced sales by these companies’ foreign units, which didn’t fully recover for three years. The researchers find that because the parent companies couldn’t borrow from Commerzbank, they withdrew equity and borrowed money from their affiliates, which constrained the foreign units’ operations.

“The average affiliate in a country outside Germany experienced a decrease in sales of approximately 10 percent” as the parent companies tapped the units for cash, the researchers report. “Our calculations suggest that there were large effects on aggregate sales in countries where German affiliates play an important role in the aggregate economy.”

Specifically, Biermann and Huber calculate that if a financial shock of a similar size to the Commerzbank lending cut hit multinationals based outside the United States, it could reduce sales in the US by more than 1 percent, a result of the companies’ internal networks transmitting the shock to their American units. A similar event affecting parent companies outside the European Union could lower sales in the EU by more than 2 percent.

“Taken together, our results document how multinationals transmit financial shocks from one country to the global economy,” the researchers write. “The results in our paper suggest that if global economic integration through multinational firms continues, global business cycles may become even more synchronized in the future.”

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