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Do trade and financial linkages foster business cycle synchronization in a small economy?

  • Alicia García-Herrero

    ()

    (BBVA)

  • Juan M. Ruiz

    ()

    (Banco de España)

We estimate a system of equations to analyze whether bilateral trade and financial linkages influence business cycle synchronization directly and/or indirectly. Our paper builds upon the existing literature by using bilateral trade and financial flows for a small, open economy (Spain) as benchmark for the results, instead of the US as generally done in the literature. We find that both the similarity of productive structure and trade links promote the synchronization of cycles. However, bilateral financial links are inversely related to the co movement of output. This might point to financial integration allowing an easiertransfer of resources between two economies, which could enable their decoupling, as predicted by a standard model of international business cycles. Both the effects of trade and financial links on output synchronization are statistically significant and economically relevant.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0810e.pdf
File Function: First version, June 2008
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0810.

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Length: 39 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:bde:wpaper:0810
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