IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Industrial specialization and the asymmetry of shocks across regions

  • Sebnem Kalemli-Ozcan
  • Bent E. Sorensen
  • Oved Yosha

Economic integration, through greater capital market integration, will induce higher regional specialization in production, rendering regional shocks less symmetric. To support this claim empirically, we develop a utility based measure of shock asymmetry and calculate it for each U.S. state. We regress it (using both ordinary least squares and instrumental variables) on a state-by-state 1-digit industrial specialization index and a 2-digit manufacturing specialization index, controlling for relevant economic and demographic variables. The main empirical result is that both specialization indices are positively and significantly correlated with the degree of shock asymmetry in both ordinary least squares and instrumental variables regressions. ; This finding, combined with the causal relation running from inter-regional capital market integration to regional specialization in production found in Kalemli-Ozcan, Sorensen, and Yosha (1999), points to the following chain of events: Economic integration fosters the development of institutions that facilitate inter-regional risk sharing. Equipped with better insurance against asymmetric shocks, regions can afford to increase their specialization in production which, in turn, renders shocks more asymmetric. This mechanism counter-balances the effect suggested by Frankel and Rose (1998)--that economic integration among regions (or countries) will induce more trade among them rendering regional shocks more symmetric. Which effect will dominate is an open empirical question.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 99-06.

in new window

Date of creation: 1999
Date of revision:
Handle: RePEc:fip:fedkrw:99-06
Contact details of provider: Postal: 1 Memorial Drive, Kansas City, MO 64198-0001
Phone: (816) 881-2254
Web page:

More information through EDIRC

Order Information: Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Todd E. Clark & Eric Van Wincoop, 1999. "Borders and business cycles," Staff Reports 91, Federal Reserve Bank of New York.
  2. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
  3. Sørensen, Bent E & Yosha, Oved, 1999. "Risk Sharing and Industrial Specialization: Regional and International Evidence," CEPR Discussion Papers 2295, C.E.P.R. Discussion Papers.
  4. Cohen, Daniel & Wyplosz, Charles, 1989. "The European Monetary Union: An Agnostic Evaluation," CEPR Discussion Papers 306, C.E.P.R. Discussion Papers.
  5. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  6. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  7. Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
  8. Fatás, Antonio, 1997. "EMU: Countries or Regions? Lessons from the EMS Experience," CEPR Discussion Papers 1558, C.E.P.R. Discussion Papers.
  9. Forni, Mario & Reichlin, Lucrezia, 1997. "National Policies and Local Economies: Europe and the United States," CEPR Discussion Papers 1632, C.E.P.R. Discussion Papers.
  10. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
  11. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
  12. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
  13. Feeney, JoAnne, 1994. "Goods and Asset Market Interdependence in a Risky World," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 551-63, August.
  14. De Grauwe, Paul & Vanhaverbeke, Wim, 1991. "Is Europe an Optimum Currency Area? Evidence from Regional Data," CEPR Discussion Papers 555, C.E.P.R. Discussion Papers.
  15. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  16. Del Negro, Marco, 2002. "Asymmetric shocks among U.S. states," Journal of International Economics, Elsevier, vol. 56(2), pages 273-297, March.
  17. Ruffin, Roy J., 1974. "Comparative advantage under uncertainty," Journal of International Economics, Elsevier, vol. 4(3), pages 261-273, August.
  18. Todd E. Clark & Kwanho Shin, 1998. "The sources of fluctuations within and across countries," Research Working Paper 98-04, Federal Reserve Bank of Kansas City.
  19. Giannetti, Mariassunta, 2002. "The effects of integration on regional disparities: Convergence, divergence or both?," European Economic Review, Elsevier, vol. 46(3), pages 539-567, March.
  20. Sorensen, Bent E. & Yosha, Oved, 1998. "International risk sharing and European monetary unification," Journal of International Economics, Elsevier, vol. 45(2), pages 211-238, August.
  21. Helpman, Elhanan & Razin, Assaf, 1978. "A theory of international trade under uncertainty," MPRA Paper 22112, University Library of Munich, Germany.
  22. Gregory D. Hess & Kwanho Shin, 1995. "Intranational business cycles in the United States," Research Working Paper 95-07, Federal Reserve Bank of Kansas City.
  23. Feeney, JoAnne, 1999. "International risk sharing, learning by doing, and growth," Journal of Development Economics, Elsevier, vol. 58(2), pages 297-318, April.
  24. Saint-Paul, G., 1990. "Technological Choice, Financial Markets and Economic Development," DELTA Working Papers 90-30, DELTA (Ecole normale supérieure).
  25. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers.
  26. Wacziarg, Romain & Imbs, Jean, 2000. "Stages of Diversification," Research Papers 1653, Stanford University, Graduate School of Business.
  27. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
  28. Jinill Kim & Sunghyun Henry Kim & Andrew Levin, 2000. "Patience, Persistence and Properties of Two-Country Incomplete Market Models," Econometric Society World Congress 2000 Contributed Papers 1764, Econometric Society.
  29. Tesar, Linda L., 1995. "Evaluating the gains from international risksharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 95-143, June.
  30. Canova, Fabio & Dellas, Harris, 1993. "Trade interdependence and the international business cycle," Journal of International Economics, Elsevier, vol. 34(1-2), pages 23-47, February.
  31. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
  32. Bent E. Sorensen & Oved Yosha, 2000. "Is risk sharing in the United States a regional phenomenon?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 33-47.
  33. Brainard, William C. & Cooper, Richard N., 1968. "Uncertainty and Diversification in International Trade," Food Research Institute Studies, Stanford University, Food Research Institute, issue 03.
  34. repec:oup:restud:v:45:y:1978:i:2:p:239-50 is not listed on IDEAS
  35. Kemp, Murray C & Liviatan, Nissan, 1973. "Production and Trade Patterns under Uncertainty," The Economic Record, The Economic Society of Australia, vol. 49(126), pages 215-27, June.
  36. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
  37. Kollmann, Robert, 1995. "The correlation of productivity growth across regions and industries in the United States," Economics Letters, Elsevier, vol. 47(3-4), pages 437-443, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedkrw:99-06. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.