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Trade Intensity and Business Cycle Synchronization: Are Developing Countries any Different?

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  • César Calderón
  • Alberto E. Chong
  • Ernesto H. Stein

Abstract

Some key criteria in the optimal currency area literature are that countries should join a currency union if they have closer international trade links and more symmetric business cycles. However, both criteria are endogenous. Frankel and Rose (1998) find that trade intensity increases cycle correlation among industrial countries. We study whether the same result holds true for the case of developing countries, as their different patterns of international trade and specialization may lead to cyclical asymmetries among them and between industrial and developing countries. We gather annual information for 147 countries for 1960-99 (33,676 country pairs) and find: (i) countries with higher bilateral trade exhibit higher business cycle synchronization, with an increase of one standard deviation in bilateral trade intensity raising the output correlation from 0.05 to 0.09 for all country pairs; (ii) countries with more asymmetric structures of production exhibit a smaller business cycle correlation; (iii) the impact of trade integration on business cycles is higher for industrial countries than both developing and industrial-developing country pairs; (iv) a one standard deviation increase in bilateral trade intensity leads to surges in output correlation from 0.25 to 0.39 among industrial countries, from 0.08 to 0.10 for our sample of industrial-developing country pairs, and from 0.03 to 0.06 among developing countries; (v) the impact of trade intensity on cycle correlation is smaller the greater the production structure asymmetries between the countries.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 6501.

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Date of creation: Jan 2003
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Handle: RePEc:idb:brikps:6501

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Keywords: Integration & Trade; WP-478;

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  1. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1473, C.E.P.R. Discussion Papers.
  2. William C. Gruben & Jahyeong Koo & Eric Millis, 2002. "How much does international trade affect business cycle synchronization ?," Working Papers, Federal Reserve Bank of Dallas 0203, Federal Reserve Bank of Dallas.
  3. Kwanho Shin & Yunjong Wang, 2003. "Trade Integration and Business Cycle Synchronization in East Asia," Asian Economic Papers, MIT Press, MIT Press, vol. 2(3), pages 1-20.
  4. Shin, Kwanho & Wang, Yunjong, 2004. "Trade integration and business cycle co-movements: the case of Korea with other Asian countries," Japan and the World Economy, Elsevier, Elsevier, vol. 16(2), pages 213-230, April.
  5. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 387-409.
  6. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Is EMU more justifiable ex post than ex ante?," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 753-760, April.
  7. M. Ayhan Kose & Kei-Mu Yi, 2001. "International Trade and Business Cycles: Is Vertical Specialization the Missing Link?," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 371-375, May.
  8. Todd E. Clark & Eric van Wincoop, 1999. "Borders and business cycles," Staff Reports, Federal Reserve Bank of New York 91, Federal Reserve Bank of New York.
  9. Glick, Reuven & Rose, Andrew K., 2002. "Does a currency union affect trade? The time-series evidence," European Economic Review, Elsevier, Elsevier, vol. 46(6), pages 1125-1151, June.
  10. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 81(4), pages 575-593, November.
  11. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers, National Bureau of Economic Research, Inc 5377, National Bureau of Economic Research, Inc.
  12. Jean Imbs, 2003. "Trade, Finance, Specialization, and Synchronization," IMF Working Papers, International Monetary Fund 03/81, International Monetary Fund.
  13. Andrew K. Rose & Charles Engel, 2000. "Currency Unions and International Integration," NBER Working Papers, National Bureau of Economic Research, Inc 7872, National Bureau of Economic Research, Inc.
  14. Kalemli-Ozcan, Sebnem & Sorensen, Bent E. & Yosha, Oved, 2001. "Economic integration, industrial specialization, and the asymmetry of macroeconomic fluctuations," Journal of International Economics, Elsevier, Elsevier, vol. 55(1), pages 107-137, October.
  15. Fidrmuc, Jarko, 2001. "The Endogeneity of optimum currency area criteria, intraindustry trade and EMU enlargement," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 8/2001, Bank of Finland, Institute for Economies in Transition.
  16. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers, National Bureau of Economic Research, Inc 5531, National Bureau of Economic Research, Inc.
  17. Barry Eichengreen & Douglas A. Irwin, 1996. "The Role of History in Bilateral Trade Flows," NBER Working Papers, National Bureau of Economic Research, Inc 5565, National Bureau of Economic Research, Inc.
  18. Frankel, Jeffrey & Rose, Andrew K., 2001. "An Estimate of the Effect of Common Currencies on Trade and Income," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp01-013, Harvard University, John F. Kennedy School of Government.
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