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Trade and synchronization in a multi-country economy

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  • Juvenal, Luciana
  • Santos Monteiro, Paulo

Abstract

Countries with strong trade linkages have more synchronized business cycles. However, the standard international business cycle framework cannot replicate this finding, uncovering the trade-comovement puzzle. Modeling trade using more sophisticated micro-level assumptions does not help resolve the puzzle. This happens because for a large class of trade models, under certain macro-level conditions, output comovement is determined by the same factor structure. We show that in such models comovement can be explained by three factors: (i) the correlation between each country's TFP; (ii) the correlation between each country's share of expenditure on domestic goods; and (iii) the correlation between each country's TFP and the partner's share of expenditure on domestic goods. An empirical investigation of the link between trade and each of the three factors shows that the trade-comovement relation is in large part explained by the second factor while in the theoretical model this factor reacts counterfactually to changes in trade costs.

Suggested Citation

  • Juvenal, Luciana & Santos Monteiro, Paulo, 2017. "Trade and synchronization in a multi-country economy," European Economic Review, Elsevier, vol. 92(C), pages 385-415.
  • Handle: RePEc:eee:eecrev:v:92:y:2017:i:c:p:385-415
    DOI: 10.1016/j.euroecorev.2016.06.005
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    4. Liao, Wei & Santacreu, Ana Maria, 2015. "The trade comovement puzzle and the margins of international trade," Journal of International Economics, Elsevier, vol. 96(2), pages 266-288.
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    7. Robert C. Johnson, 2014. "Trade in Intermediate Inputs and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 39-83, October.

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    More about this item

    Keywords

    Business cycle synchronization; International trade;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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