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Putting the Parts together

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Author Info

  • Andrei A. Levchenko
  • Julian di Giovanni

Abstract

Countries that trade more with each other exhibit higher business cycle correlation. This paper examines the mechanisms underlying this relationship using a large cross-country industry-level panel dataset of manufacturing production and trade. We show that sector pairs that experience more bilateral trade exhibit stronger comovement. Vertical linkages in production are an important explanation behind this effect: bilateral international trade increases comovement significantly more in cross-border industry pairs that use each other as intermediate inputs. Our estimates imply that these vertical production linkages account for some 30% of the total impact of bilateral trade on the business cycle correlation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/181.

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Length: 55
Date of creation: 01 Aug 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/181

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Keywords: International trade; Bilateral trade; Economic models; Industrial production; Industrial sector; Industrial trade; Manufacturing sector; Trade relations; correlation; impact of trade; correlations; output growth; standard errors; equation; industry trade; elasticity of substitution; trade intensity; statistics; intermediate inputs; trade openness; transmission of shocks; world trade; standard deviations; trade flows; aggregate volatility; vertical specialization; trading partners; trade variables; independent variable; world trade organization; aggregate demand; trade volumes; random coefficient; value of exports; standard error; trade data; apparel sector; samples; trade changes; standard deviation; intermediate goods; nonlinearity; political economy; accession countries; trade values; global trade; aggregate trade; world economy; trading partner; measure of trade; non-tariff barriers; covariance; exchange rate regimes; transport equipment; descriptive statistics; imported intermediate; integral; external finance; ring theory; tariff barriers; imported intermediates; equations; partner country; intermediate products; metal products; trade volume; economic integration; measurement error; closed economy; unskilled labor;

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References

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  1. M. Ayhan Kose & Kei-Mu Yi, 2001. "International Trade and Business Cycles: Is Vertical Specialization the Missing Link?," American Economic Review, American Economic Association, vol. 91(2), pages 371-375, May.
  2. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  3. Calderon, Cesar & Chong, Alberto & Stein, Ernesto, 2007. "Trade intensity and business cycle synchronization: Are developing countries any different?," Journal of International Economics, Elsevier, vol. 71(1), pages 2-21, March.
  4. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
  5. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
  6. 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.
  7. Kevin X. D. Huang & Zheng Liu, 2003. "Business Cycles with Staggered Prices and International Trade in Intermediate Inputs," Emory Economics 0308, Department of Economics, Emory University (Atlanta).
  8. Vasco Carvalho, 2007. "Aggregate fluctuations and the network structure of intersectoral trade," Economics Working Papers 1206, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2010.
  9. Ananth Ramanarayanan & Costas Arkolakis, 2009. "Vertical Specialization and International Business Cycle Synchronization," 2009 Meeting Papers 780, Society for Economic Dynamics.
  10. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
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