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The trade comovement problem in international macroeconomics

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Author Info
M. Ayhan Kose
Kei-Mu Yi

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Abstract

Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: complete markets and international financial autarky. Our main finding is that under international financial autarky the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. In our benchmark calibrations, the model explains at most 6 percent of the responsiveness of GDP correlations to trade found in the empirical research. This result is robust to many combinations of shock specifications, import shares, and elasticities of substitution. Because the difference between business cycle theory and the empirical results cannot be resolved by changes in parameter values and the structure of the standard models, we call this discrepancy the trade comovement problem.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 155.

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Date of creation: 2002
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Handle: RePEc:fip:fednsr:155

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Keywords: International trade Business cycles

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Clark, Todd E. & van Wincoop, Eric, 2001. "Borders and business cycles," Journal of International Economics, Elsevier, vol. 55(1), pages 59-85, October. [Downloadable!] (restricted)
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  3. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March. [Downloadable!] (restricted)
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  4. César Calderón & Alberto Chong & Ernesto Stein, 2002. "Trade Intensity and Business Cycle Synchronization: Are Developing Countries Any Different?," Working Papers Central Bank of Chile 195, Central Bank of Chile. [Downloadable!]
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  5. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July. [Downloadable!] (restricted)
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  6. AMBLER, Steve & CARDIA, Emanuela & ZIMMERMANN, Christian, 2000. "International Transmission of the Business Cycle in a Multi-Sector Model," Cahiers de recherche 2000-06, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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  7. Eswar Prasad, 1999. "International Trade and the Business Cycle," IMF Working Papers 99/56, International Monetary Fund.
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  8. Mazzenga, Elisabetta & Ravn, Morten O., 2002. "International Business Cycles: The Quantitative Role of Transportation Costs," CEPR Discussion Papers 3530, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November. [Downloadable!] (restricted)
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  10. Anderson, H.M. & Kwark, N.-S. & Vahid, F., 1999. "Does International Trade Synchronize Business Cycles?," Monash Econometrics and Business Statistics Working Papers 8/99, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  11. Jarko Fidrmuc, 2004. "The Endogeneity of the Optimum Currency Area Criteria, Intra-industry Trade, and EMU Enlargement," Contemporary Economic Policy, Oxford University Press, vol. 22(1), pages 1-12, January.
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  12. Zimmermann, Christian, 1997. "International real business cycles among heterogeneous countries," European Economic Review, Elsevier, vol. 41(2), pages 319-356, February. [Downloadable!] (restricted)
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  13. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April. [Downloadable!] (restricted)
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  14. Imbs, Jean, 1999. "Co-Fluctuations," CEPR Discussion Papers 2267, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Canova, Fabio & Dellas, Harris, 1993. "Trade interdependence and the international business cycle," Journal of International Economics, Elsevier, vol. 34(1-2), pages 23-47, February. [Downloadable!] (restricted)
  16. Allen C. Head, 2002. "Aggregate Fluctuations with National and International Returns to Scale," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1101-1125, November. [Downloadable!] (restricted)
  17. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June. [Downloadable!] (restricted)
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  18. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February. [Downloadable!] (restricted)
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  19. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August. [Downloadable!] (restricted)
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  20. Stephanie Schmitt-Grohe, 1995. "The international transmission of economic fluctuations: effects of U. S. business cycles on the Canadian economy," Finance and Economics Discussion Series 95-6, Board of Governors of the Federal Reserve System (U.S.).
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  21. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues 96-9, Federal Reserve Bank of Chicago. [Downloadable!]
  22. Glenn Otto & Graham Voss & Luke Willard, 2001. "Understanding OECD Output Correlations," RBA Research Discussion Papers rdp2001-05, Reserve Bank of Australia. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Brian M. Doyle & Jon Faust, 2003. "Breaks in the variability and co-movement of G-7 economic growth," International Finance Discussion Papers 786, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  2. M. Ayhan Kose & Eswar Prasad & Marco Terrones, 2003. "How Does Globalization Affect the Synchronization of Business Cycles?," IMF Working Papers 03/27, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Ariel Burstein & Christopher Johann Kurz & Linda Tesar, 2004. "Trade, Production Sharing and the International Transmission of Business Cycles," Working Papers 522, Research Seminar in International Economics, University of Michigan. [Downloadable!]
    Other versions:
  4. M. Ayhan Kose & Kei-Mu Yi, 2005. "Can the standard international business cycle model explain the relation between trade and comovement?," Working Papers 05-3, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  5. Alejandro Justiniano, 2004. "Sources and Propagation Mechanims of Foreign Disturbances in Small Open Economies: A Dynamic Factor Analysis," Econometric Society 2004 Latin American Meetings 148, Econometric Society. [Downloadable!]
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