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Industrial specialization and the asymmetry of shocks across regions

Author

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

Abstract

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.

Suggested Citation

  • Sebnem Kalemli-Ozcan & Bent E. Sorensen & Oved Yosha, 1999. "Industrial specialization and the asymmetry of shocks across regions," Research Working Paper 99-06, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:99-06
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    Cited by:

    1. Sebnem Kalemli-Ozcan & Elias Papaioannou & José Luis Peydró, 2010. "Financial Regulation, Integration and Synchronization of Economic Activity," Koç University-TUSIAD Economic Research Forum Working Papers 1005, Koc University-TUSIAD Economic Research Forum, revised Apr 2010.
    2. Sebnem Kalemli-Ozcan & Elias Papaioannou & José-Luis Peydró, 2013. "Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity," Journal of Finance, American Finance Association, vol. 68(3), pages 1179-1228, June.
    3. Kalemli-Ozcan, Sebnem & Papaioannou, Elias & Perri, Fabrizio, 2013. "Global banks and crisis transmission," Journal of International Economics, Elsevier, vol. 89(2), pages 495-510.
    4. Clark, Todd E. & van Wincoop, Eric, 2001. "Borders and business cycles," Journal of International Economics, Elsevier, vol. 55(1), pages 59-85, October.
    5. Robert Dixon & David Shepherd, 2013. "Regional Dimensions of the Australian Business Cycle," Regional Studies, Taylor & Francis Journals, vol. 47(2), pages 264-281, February.
    6. Demyanyk, Yuliya & Volosovych, Vadym, 2008. "Gains from financial integration in the European Union: Evidence for new and old members," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 277-294, March.
    7. Sebnem Kalemli-Ozcan & Bent E. Sorensen & Oved Yosha, 2004. "Asymmetric Shocks and Risk Sharing in a Monetary Union: Updated Evidence and Policy Implications for Europe," Working Papers 2004-05, Department of Economics, University of Houston.
    8. Christiansen, Charlotte & Ranaldo, Angelo, 2009. "Extreme coexceedances in new EU member states' stock markets," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1048-1057, June.
    9. Demyanyk, Yuliya & Volosovych, Vadym, 2005. "Macroeconomic Asymmetry in the European Union: The Difference Between New and Old Members," CEPR Discussion Papers 4847, C.E.P.R. Discussion Papers.

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