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Trade Intensity and Business Cycle Synchronization: Are Developing Countries any Different?

  • César Calderón
  • Alberto E. Chong
  • Ernesto H. Stein

Some key criteria in the optimal currency area literature are that countries should join a currency union if they have closer international trade links and more symmetric business cycles. However, both criteria are endogenous. Frankel and Rose (1998) find that trade intensity increases cycle correlation among industrial countries. We study whether the same result holds true for the case of developing countries, as their different patterns of international trade and specialization may lead to cyclical asymmetries among them and between industrial and developing countries. We gather annual information for 147 countries for 1960-99 (33,676 country pairs) and find: (i) countries with higher bilateral trade exhibit higher business cycle synchronization, with an increase of one standard deviation in bilateral trade intensity raising the output correlation from 0.05 to 0.09 for all country pairs; (ii) countries with more asymmetric structures of production exhibit a smaller business cycle correlation; (iii) the impact of trade integration on business cycles is higher for industrial countries than both developing and industrial-developing country pairs; (iv) a one standard deviation increase in bilateral trade intensity leads to surges in output correlation from 0.25 to 0.39 among industrial countries, from 0.08 to 0.10 for our sample of industrial-developing country pairs, and from 0.03 to 0.06 among developing countries; (v) the impact of trade intensity on cycle correlation is smaller the greater the production structure asymmetries between the countries.

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Paper provided by Inter-American Development Bank in its series IDB Publications (Working Papers) with number 6501.

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Date of creation: Jan 2003
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Handle: RePEc:idb:brikps:6501
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  1. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  2. Reuven Glick & Andrew K. Rose, 2001. "Does a currency union affect trade? the time series evidence," Working Paper Series 2001-13, Federal Reserve Bank of San Francisco.
  3. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
  4. Engel, Charles M & Rose, Andrew K, 2001. "Currency Unions and International Integration," CEPR Discussion Papers 2659, C.E.P.R. Discussion Papers.
  5. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May.
  6. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Is EMU more justifiable ex post than ex ante?," European Economic Review, Elsevier, vol. 41(3-5), pages 753-760, April.
  7. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
  8. Lichtenberg, Frank R. & Pottelsberghe de la Potterie, Bruno v., 1998. "International R&D spillovers: A comment," European Economic Review, Elsevier, vol. 42(8), pages 1483-1491, September.
  9. Todd E. Clark & Eric van Wincoop, 1999. "Borders and business cycles," Research Working Paper 99-07, Federal Reserve Bank of Kansas City.
  10. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
  11. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
  12. Alan C. Stockman, 1987. "Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries," NBER Working Papers 2313, National Bureau of Economic Research, Inc.
  13. Imbs, Jean, 2003. "Trade, Finance, Specialization and Synchronization," CEPR Discussion Papers 3779, C.E.P.R. Discussion Papers.
  14. M. Ayhan Kose & Kei-Mu Yi, 2001. "International Trade and Business Cycles: Is Vertical Specialization the Missing Link?," American Economic Review, American Economic Association, vol. 91(2), pages 371-375, May.
  15. Shin, Kwanho & Wang, Yunjong, 2004. "Trade integration and business cycle co-movements: the case of Korea with other Asian countries," Japan and the World Economy, Elsevier, vol. 16(2), pages 213-230, April.
  16. Fidrmuc, Jarko, 2001. "The Endogeneity of optimum currency area criteria, intraindustry trade and EMU enlargement," BOFIT Discussion Papers 8/2001, Bank of Finland, Institute for Economies in Transition.
  17. Kalemli-Ozcan, Sebnem & Sorensen, Bent E. & Yosha, Oved, 2001. "Economic integration, industrial specialization, and the asymmetry of macroeconomic fluctuations," Journal of International Economics, Elsevier, vol. 55(1), pages 107-137, October.
  18. 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.
  19. Kwanho Shin & Yunjong Wang, 2003. "Trade Integration and Business Cycle Synchronization in East Asia," ISER Discussion Paper 0574, Institute of Social and Economic Research, Osaka University.
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