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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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Related research

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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