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Trade and Synchronization in a Multi Country Economy

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  • Paulo Santos Monteiro

    (University of Warwick)

  • Luciana Juvenal

    (Federal Reserve Bank of St Louis)

Abstract

Substantial evidence suggests that countries with stronger trade linkages have more synchronized business cycles. The standard international business cycle framework cannot replicate this finding, uncovering the trade-comovement puzzle. We show that under certain macro-level conditions but irrespective of the micro-level assumptions concerning trade the puzzle arises because trade fails to substantially increase the correlation between each country's import penetration ratio and the trade partner's technology shock. Within a large class of trade models, there are three channels through which bilateral trade may increase business cycle synchronization. Specifically, increased bilateral trade may (i) raise the correlation between each country's technology shocks, (ii) raise the correlation between each country's share of expenditure on domestic goods, and (iii) raise the response of the domestic import penetration ratio to foreign technology shocks. Empirical evidence strongly supports the first and second channels. We show that the trade-comovement puzzle can be resolved if productivity shocks are more correlated between country-pairs that trade more.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 59.

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Date of creation: 2012
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Handle: RePEc:red:sed012:59

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  1. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
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  5. César Calderón & Alberto E. Chong & Ernesto H. Stein, 2003. "Trade Intensity and Business Cycle Synchronization: Are Developing Countries any Different?," IDB Publications 6501, Inter-American Development Bank.
  6. Zimmermann, Christian, 1997. "International real business cycles among heterogeneous countries," European Economic Review, Elsevier, vol. 41(2), pages 319-356, February.
  7. 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.
  8. Ananth Ramanarayanan & Costas Arkolakis, 2009. "Vertical Specialization and International Business Cycle Synchronization," 2009 Meeting Papers 780, Society for Economic Dynamics.
  9. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  10. Andrei A. Levchenko & Julian di Giovanni, 2009. "Putting the Parts together," IMF Working Papers 09/181, International Monetary Fund.
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  13. Jean Imbs, 2004. "Trade, Finance, Specialization, and Synchronization," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 723-734, August.
  14. Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
  15. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  16. James Heckman & Edward Vytlacil, 1998. "Instrumental Variables Methods for the Correlated Random Coefficient Model: Estimating the Average Rate of Return to Schooling When the Return is Correlated with Schooling," Journal of Human Resources, University of Wisconsin Press, vol. 33(4), pages 974-987.
  17. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  18. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andrés Rodríguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," NBER Working Papers 13933, National Bureau of Economic Research, Inc.
  19. Robert C. Johnson, 2012. "Trade in Intermediate Inputs and Business Cycle Comovement," NBER Working Papers 18240, National Bureau of Economic Research, Inc.
  20. 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.
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Cited by:
  1. Ioannis Tsamourgelis & Persa Paflioti & Thomas Vitsounis, 2013. "Seaports Activity (A)synchronicity, Trade Intensity and Business Cycle Convergence: A Panel Data Analysis," International Journal of Maritime, Trade & Economic Issues (IJMTEI), International Journal of Maritime, Trade & Economic Issues (IJMTEI), vol. 0(1), pages 67-92.
  2. Robert C. Johnson, 2012. "Trade in Intermediate Inputs and Business Cycle Comovement," NBER Working Papers 18240, National Bureau of Economic Research, Inc.

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