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How much does international trade affect business cycle synchronization ?

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  • William C. Gruben
  • Jahyeong Koo
  • Eric Millis

Abstract

In a recent article, Jeffrey Frankel and Andrew Rose (1998) examine the hypothesis that greater trade flows between two countries cause greater synchronicity between their business cycles. The increase in business cycle synchronicity may be seen as rationalizing a common monetary policy and, so, a shared currency. Arguing that product specialization would lower the synchronicity of business cycles, Frankel and Rose posit that a regression of output correlation on overall trade will indicate whether (positive) common demand shocks and productivity spillovers dominate or (negative) specialization effects do. The authors apply instrumental variables to confirm a causal relationship. In this paper, we refine the estimation in two ways. First, we test for instrument validity and find that the confirming null hypothesis is rejected in most cases. We find evidence to suggest that the instrumental variables method applied is inappropriate and results in inflated coefficients. We develop and apply an alternative OLS-based estimation procedure. Second, we add structure-of-trade variables to the model to separate the effects of intra- and inter-industry trade flows. Although our results suggest that the Frankel and Rose model overestimates the effect of trade on business cycle correlation, the overall results of our model are consistent with theirs. With our own model estimation, we find that specialization generally does not significantly asynchronize business cycles between two countries.

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  • William C. Gruben & Jahyeong Koo & Eric Millis, 2002. "How much does international trade affect business cycle synchronization ?," Working Papers 0203, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:0203
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    Cited by:

    1. Brian M. Doyle & Jon Faust, 2005. "Breaks in the Variability and Comovement of G-7 Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 721-740, November.
    2. Jean Imbs, 2004. "Trade, Finance, Specialization, and Synchronization," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 723-734, August.
    3. Michael Artis & Toshihiro Okubo, 2008. "The Intranational Business Cycle: Evidence from Japan," Centre for Growth and Business Cycle Research Discussion Paper Series 101, Economics, The Univeristy of Manchester.
    4. Hsu, Chih-Chiang & Wu, Jyun-Yi & Yau, Ruey, 2011. "Foreign direct investment and business cycle co-movements: The panel data evidence," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 770-783.
    5. Zuzana Brixiova & Qingwei Meng & Mthuli Ncube, 2015. "Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, pages 141-162.
    6. Inklaar, Robert & Jong-A-Pin, Richard & de Haan, Jakob, 2008. "Trade and business cycle synchronization in OECD countries--A re-examination," European Economic Review, Elsevier, vol. 52(4), pages 646-666, May.
    7. Saša Obradović & Vladimir Mihajlović, 2013. "Synchronization of Business Cycles in the Selected European Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(6), pages 759-773, December.
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    14. repec:taf:irapec:v:31:y:2017:i:2:p:255-282 is not listed on IDEAS
    15. Hasan Engin Duran, 2015. "Dynamics of Business Cycle Synchronization in Turkey," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(5), pages 581-606, December.
    16. Hasan Engin Duran & Alexandra Ferreira-Lopes, 2017. "Determinants of co-movement and of lead and lag behavior of business cycles in the Eurozone," International Review of Applied Economics, Taylor & Francis Journals, vol. 31(2), pages 255-282, March.
    17. Nabil Alimi, 2015. "The Effect of Trade, Specialization and Financial Integration on Business Cycles Synchronization in Some Mediterranean Countries," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(1), pages 110-118, January.
    18. Changchun Hua & Douglas H. Brooks, 2010. "Asian Trade and Global Linkages," Working Papers id:3094, eSocialSciences.
    19. Manuel Ramos Francia & Daniel Chiquiar, 2004. "Bilateral Trade and Business Cycle Synchronization: Evidence from Mexico and United States Manufacturing Industries," Working Papers 2004-05, Banco de México.
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    21. Kappler Marcus, 2011. "Business Cycle Co-movement and Trade Intensity in the Euro Area: is there a Dynamic Link?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(2), pages 247-265, April.
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    23. Yetman, James, 2011. "Exporting recessions: International links and the business cycle," Economics Letters, Elsevier, vol. 110(1), pages 12-14, January.
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