Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement
AbstractA well established empirical result is that 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 higher bilateral trade in an individual sector increases both the co-movement within the sector between trading countries, as well as the comovement between that sector and the rest of the economy of the trading partner. We also demonstrate that vertical linkages in production are an important force behind the overall impact of trade on business cycle synchronization. The elasticity of comovement with respect to bilateral trade is significantly higher in industry pairs that use each other as intermediate inputs in production. Our estimates imply that vertical production linkages account for some 30% of the total impact of bilateral trade on business cycle correlation for our full country sample. Finally, the positive impact of trade on industry-level comovement is far more pronounced in the North-North country pairs compared to either the South-South or North-South country pairs. However, the relative contribution of vertical linkages to aggregate comovement is roughly three times greater for North-South trade than North-North trade.
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Bibliographic InfoPaper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 580.
Length: 40 pages
Date of creation: Sep 2008
Date of revision:
trade; institutional change;
Other versions of this item:
- Julian di Giovanni & Andrei A. Levchenko, 2010. "Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 95-124, April.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-22 (All new papers)
- NEP-INT-2009-03-22 (International Trade)
- NEP-OPM-2009-03-22 (Open Economy Macroeconomics)
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