The international transmission of real business cycle during financial crisis can differ dramatically depending on the type of debt market integration. We provide a two-country DSGE model distinguishing two transmission channels of financial shocks: (i) balance sheet effect in the short-term debt market, where financially constrained borrowers are readily accessible, and (ii) efficient capital allocation through the long-term debt market, where unconstrained agents participate. Consistent with the model’s prediction, our empirical analysis shows that short-term debt market integration drives business cycle synchronisation during crisis, whereas long-term debt market integration cushions the international transmission of business cycle.