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Common Trade Exposure and Business Cycle Comovement

Author

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  • Oscar Avila-Montealegre
  • Carter Mix

Abstract

A large empirical literature has shown that countries that trade more with each other have more correlated business cycles. We show that previous estimates of this relationship are biased upward because they ignore common trade exposure to other countries. When we account for common trade exposure to foreign business cycles, we find that (1) the effect of bilateral trade on business cycle comovement falls by roughly 25 percent and (2) common exposure is a significant driver of business cycle comovement. A standard international real business cycle model is qualitatively consistent with these facts but fails to reproduce their magnitudes. Past studies have used models that allow for productivity shock transmission through trade to strengthen the relationship between trade and comovement. We find that productivity shock transmission increases business cycle comovement largely because of a country-pair's common trade exposure to other countries rather than because of bilateral trade. When we allow for stronger transmission between small open economies than other country-pairs, comovement increases both from bilateral trade and common exposure, similar to the data. **** La literatura empírica ha mostrado que países que comercian más entre ellos tienen ciclos económicos más correlacionados. En este artículo mostramos que las estimaciones previas de la relación comercio-sincronización están sesgados al alza pues ignoran el hecho de que los países están expuestos a socios comerciales comunes. Cuando incluímos el efecto de la exposición comercial común a ciclos comerciales externos, encontramos que 1) el efecto del comercio bilateral se reduce cerca del 25 % y 2) la exposición común es un factor importante para la sincronización de ciclos económicos. Un modelo estándar de ciclos económicos reales es cuantitativamente consistente con estas relaciones pero falla al momento de reproducir sus magnitudes. Encontramos que la transmisión de choques de productividad aumenta la sincronización del ciclo económico principalmente a través de la exposición comercial común de los países, más allá del comercio bilateral. Cuando permitimos una mayor transmisión de productividad entre economías pequeñas, la sincronización aumenta tanto por comercio bilareral como por exposición común, consistente con la evidencia empírica.

Suggested Citation

  • Oscar Avila-Montealegre & Carter Mix, 2020. "Common Trade Exposure and Business Cycle Comovement," Borradores de Economia 1149, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1149
    DOI: https://doi.org/10.32468/be.1149
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    References listed on IDEAS

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    More about this item

    Keywords

    trade; business cycles; open economy macroeconomics; Comercio internacional; ciclos económicos; macroeconomía abierta;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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