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Trade, finance or policies: What drives the cross-border spill-over of business cycles?

Listed author(s):
  • Montinari, Letizia
  • Stracca, Livio

In this paper we investigate how income growth rates in one country are affected by growth rates in partner countries, testing for the importance of pairwise country links as well as characteristics of the receiving country (trade and financial openness, exchange rate regime, fiscal variables). We find that trade integration fosters the spill-over of business cycles, both bilaterally and as a country characteristic (trade openness). Results for financial integration are mixed; financial links as pairwise country characteristic are either insignificant or negatively signed (indicating a dampening of cross country spill-overs), but financial openness as characteristic of the receiving country amplifies spill-overs. We find no evidence for a role of the exchange rate regime. Finally, we find that higher government spending and debt reduces countries’ vulnerability to foreign business cycles, presumably through the effect of automatic stabilizers.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 49 (2016)
Issue (Month): C ()
Pages: 131-148

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Handle: RePEc:eee:jmacro:v:49:y:2016:i:c:p:131-148
DOI: 10.1016/j.jmacro.2016.06.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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